Annual Report • Apr 27, 2023
Annual Report
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2 0 22 Sistema Public Joint Stock Financial Corporation Annual report CONTENTS 1. 2. COMPANY OVERVIEW PERFORMANCE OF THE CORPORATION Sistema today 4. CORPORATE GOVERNANCE Corporate governance system Remuneration policy applied to board members and senior management Integrated risk management system and the group’s risk appetite 3. RESULTS OF KEY ASSETS MTS OZON Segezha Group Etalon Group MEDSI Steppe AgroHolding Binnopharm Group Other consolidated assets Strategy and governance model Investment Portfolio Financial overview Securities and share capital SUSTAINABILITY MANAGEMENT Management system Responsible investment Key ESG areas Social investments and activities 190 6. AUDITED CONSOLIDATED FINANCIAL STATEMENTS 12 14 26 30 6 8 10 172 174 176 180 188 142 144 160 162 36 38 48 54 76 84 98 108 116 02 03 About the report SISTEMA PJSFC Annual report 2022 sistema.com Responsibility statement About the report To the best of my knowledge (a) the consolidated financial statements, prepared in accordance with IFRS, give a true and fair view of the assets, liabilities, financial position and profit or loss of Sistema PJSFC and the undertakings included in the consolidation taken as a whole; and (b) the management report includes a fair review of the development and performance of the business and the position of Sistema PJSFC and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face. Yours sincerely, Disclaimer This annual report contains information about the activities of Sistema Public Joint Stock Financial Corporation and its portfolio companies (hereinafter, “Sistema”, “Sistema PJSFC” “the Corporation” or, together with its subsidiaries and affiliates, “Sistema Group”, “the Group” or “the Group companies”) in 2022. Unless otherwise stated, the financial results presented in this annual report are based on IFRS consolidated financial statements. The audit of Sistema’s 2022 consolidated financial statements in accordance with IFRS was performed by AO “Business Solutions and Technologies”. The report also provides information about the Corporation’s environmental, social and governance effectiveness. The annual report may contain minor inaccuracies in the estimation of shares, percentages and amounts due to the rounding of numbers. There may be insignificant discrepancies between the data contained in this annual report and the data disclosed earlier due to the rounding differences. For other annual reports of the Corporation please go to the Investors and Shareholders section on the company’s website (www.sistema.com). Some of the statements in this annual report may contain assumptions or forecasts concerning the forthcoming or expected events at Sistema or its portfolio companies. Such forward-looking statements contain phrases like “expected”, “estimated”, “intended”, “will”, “could”, negatives of such statements and other similar expressions. Such statements are assumptions only and the actual course of events and their results may differ significantly from those implied in the forward-looking statements. Sistema expressly disclaims any obligation to revise any forward-looking statements whether as a result of new events and circumstances that may arise in the future or to reflect any events that are not expected at the time of compiling this report. The actual results of Sistema and its portfolio companies could differ materially from those expressed in the assumptions and forecasts of this annual report due to a number of factors. Such factors may include general economic conditions, competitive environment, risks associated with the deterioration of the geopolitical situation and business operations in Russia, fast technological and market changes in the segments where Sistema and its portfolio companies operate. President Sistema PJSFC 05 About the report 04 SISTEMA PJSFC Annual report 2022 sistema.com COMPANY OVERVIEW 08 Sistema today 10 Investment portfolio 06 07 SISTEMA PJSFC Annual report 2022 Company overview sistema.com out of 160 in RAEX Europe list (ESG) No 14 Sistema today SUSTAINABLE DEVELOPMENT Overview of Sistema Group Sistema Public Joint Stock Financial Corporation is Russia's largest public investment company and one of the country's systemically important companies. Founded in 1993, Sistema is today represented across over 20 high-potential sectors of the Russian economy, including telecommunications, forestry, agriculture, pharmaceuticals, healthcare, real estate and e-commerce. The Corporation's investment portfolio is made up mostly of Russian companies operating across Russia and in more than 25 other countries. The Corporation’s shares trade on the Moscow Exchange (ticker: AFKS) and on the London Stock Exchange in the form of global depositary receipts (ticker: SSA). One GDR represents 20 ordinary shares. Publicly-traded assets Sistema's strategic goal To ensure long-term growth of shareholder value by boosting return on investments in the existing assets and reinvesting available cash in new investment projects to diversify its portfolio and increase return on investments. Sistema's sustainability goal To build competitive businesses with high added value that meet the principles of social and environmental responsibility and contribute to the sustainable development of industries and regions of operations and to the steady growth of socioeconomic and technological potential, human capital, quality of life and social well-being. 0.6 % Contribution to Russia's gross domestic product 20 Largest Russian companies by revenue (RBC) TOP 20 Public Russian companies in Forbes Global 2000 rating TOP MOEX: MTSS MOEX: SGZH LSE MOEX: ETLN NASDAQ MOEX: OZON ESG Environmental — Social — Governance ruAA– RAEX credit rating Sistema Group at a glance 1 Сredit rating countries > 25 industries > 20 companies > 25 AFKS MOEX SSA LSE 11.5 CDP Climate Change Score B Independent directors 55 % Low ESG risk Sustainalytics rating 1 As of the end of 2022. 2 Headcount as of the end of 2022. 158.6 Group investments 177.4 Headcount² 2.1 Assets 19.4 Net profit 310.4 Adjusted OIBDA 912.7 Revenue billion billion trillion thousand billion billion RUB RUB RUB RUB RUB Рeople RUB 1.8 billion Social investments 08 09 SISTEMA PJSFC Annual report 2022 sistema.com Company overview Other consolidated assets Publicly-traded assets Key non-public assets Largest vertically integrated forestry holding in Russia 62.2% Segezha Group Forest industry One of Russia’s largest public development and construction companies 48.8% Etalon Group Construction and property development Leading provider of digital, media and telecom services in Russia and the CIS 49.7% MTS 2 Telecommunications Leading Russian pharmaceutical producer 72.2% Binnopharm Group Pharma Russia’s largest healthcare chain 95.5% Medsi Healthcare Major agriculture holding and one of Russia’s largest land owners 89.7% Steppe AgroHolding Agriculture Leading vertically integrated ICT holding in Russia 1 00 % Sitronics Group Information technology One of Russia’s largest power grid companies 91% BPGC Utilities Оne of the largest real estate owners in Moscow 1 00 % Business Nedvizhimost Commercial properties One of the largest hotel management companies in the Russian market 1 00 % Cosmos Hotel Group Hospitality Leading multi-category online sales platform in Russia 31.8% Ozon 1 E-commerce Investment portfolio 1 A total of 12.2m shares were issued for the incentive programme of Ozon's management; after exercise of all options under the programme, the effective stake of Sistema, incl. Sistema VC, will be 31.8%. 2 Effective ownership as of 10 April 2023. 10 11 SISTEMA PJSFC Annual report 2022 sistema.com Company overview PERFORMANCE OF THE CORPORATION 14 Strategy and governance model 26 Financial overview 30 Securities and share capital 12 1 3 SISTEMA PJSFC Annual report 2022 Performance of the Corporation sistema.com Strategy and governance model ▪ Steadily growing the Corporation’s shareholder value and income ▪ Building profitable and growing companies that are leaders in their industries ▪ Maximising net asset value ▪ Paying dividends to the Corporation’s shareholders ▪ Raising and managing outside capital and assets The Corporation’s goals are matched with the elements of business model, which are inter-related. Sistema’s mission is to build Russia’s leading investment company with diverse expertise and a strong track record, which will become an investment platform for managing both its own and third-party capital, while also providing access to unique investment opportunities in the most attractive industries and high-potential technologies and fuelling long-term growth in shareholder value. How do we manage our portfolio? Sistemas strategy How do we create value in our Assets? How do we invest in new projects? Governance model Strategic goals and development areas Creating value in assets through team strengthening, strategic development, business transformation, operational improvements, equity structure optimisation, digitalisation, etc. Continuously enhancing the quality and effectiveness of corporate governance Focus areas: 01 04 02 05 03 Building and continuously developing businesses worth over RUB 100bn Embracing unique investment opportunities in traditional and new sectors Seizing organic and inorganic (M&A, JV) asset growth opportunities Mission Our goals can be achieved by answering 3 key questions underpinning the Corporation’s strategy: Portfolio strategy Investment process 1 2 3 Long-term goals: 1 5 Performance of the Corporation 14 SISTEMA PJSFC Annual report 2022 sistema.com Depending on the final score, there are four basic development options for assets in Sistema’s portfolio. The asset’s position in the matrix determines shareholder decisions for the company: monetise, actively develop and invest, invest in selected projects, optimise, and initiate transformation and relaunch of the asset’s business. Sistema’s strategy is based on the idea of gradual movement of assets from the left side to the right side of the matrix as assets become more mature and grow in size, as well as on balancing the asset portfolio and investment projects to ensure stable growth of shareholder returns. As part of its strategy Sistema also aims to look for new points of growth that may become the core of the company’s portfolio in 5 years or more. Portfolio strategy: current assets and new opportunities Investments in existing assets: investments in own portfolio companies that have potential to become businesses worth over RUB 100bn and ensure steady growth of shareholder value The portfolio strategy is based on classification of assets depending on market appeal, the company’s competitiveness and the team’s competences. ▪ Investment strategy: investing in the Corporation’s portfolio companies to increase their competitiveness and market share, entering adjacent segments, launching new products with a synergistic effect, enhancing operating efficiency, and increasing transparency and corporate governance quality ▪ Investment geography: in accordance with the approved strategy for portfolio companies ▪ Industries and business segments: companies’ industries and adjacent sectors/segments with a synergistic effect ▪ Shareholder returns above average for comparable companies and local/global benchmarks ▪ Discounted payback period (DPBP): from 3 to 7 years. Market size Sector’s stability amid economic downturn and sanctions Assets position vs the top 2 players and opportunity to become a leader Assessment of the teams competences compared to industry leaders Strong competitive advantages Confidence in business plan: the target and actual returns coincide Financial stability and proven business model Risks and barriers for doing business Appeal of the market Assets competitiveness Company Team – 1 2 3 4 + + Asset competitiveness Market attractiveness Monetise (through dividends and divestment) Develop and invest aggressively Optimise, transform and relaunch Invest selectively Areas of development 16 17 SISTEMA PJSFC Annual report 2022 sistema.com Performance of the Corporation ▪ Investment strategy: investments by Sistema’s existing and new VC funds; investment monetisation. Mandatory engagement of external investors as financial partners (the share of outside partners in new funds is at least 50%). ▪ Investment geography: Russia, the CIS, Asia and the Middle East. ▪ Industries and business segments: e-commerce, internet of things, artificial intelligence, cloud and edge computing, machine learning and neural networks, autonomous vehicles, robotics, augmented and virtual reality (AR/VR), blockchain, etc. Fast-growing segments Technologies ▪ Investment strategy: acquiring and consolidating players in certain industries or market segments, enhancing the asset’s competitive advantages, leveraging economies of scale and entering new market segments ▪ Investment criteria: stable financial position and positive operating cash flow, low debt burden, attractiveness for other strategic and financial investors. Assets generate positive EBITDA, which can be increased by scaling the company’s operations ▪ Geography of investments: mainly in Russia, with possible selected investments in assets and projects in the CIS and friendly or neutral foreign countries ▪ Industries and business segments: growing and stable sectors with large markets, high growth or transformation rates, significant potential for efficiency growth, digitalisation, ability to create technological advantages, import substitution or steady levels of exports to friendly and neutral countries. New investments: unique opportunities in traditional industries Investment strategy: acquisition of substantial and controlling stakes in large profitable assets in markets that are attractive in the long term with a possibility of increasing equity value and getting a premium in valuation. It also includes special situations involving the sale of stable and profitable assets in Russia by foreign investors. 01 01 02 02 Profitable undervalued assets Technology assets Growing assets VC funds New investments in tech sector and technologies of the future Investment strategy: direct investments in large stakes in technology companies, with an opportunity to create new modern digital fast-growing businesses, introduce new business models, make a breakthrough in the development of key technologies of the future and monetise them in 3 to 7 years. 5G 6G Pharmaceuticals Quantum communication AR/VR Autonomous navigation Big Data Satellites Energy accumulation technologies MedTech BlockChain Hydrogen power IoT FinTech Electric vehicles Cloud Gaming Industrial gases HealthTech New materials Cloud computing Robotics Bots AI Cybersecurity Biotech UAVs 1 9 Performance of the Corporation 18 SISTEMA PJSFC Annual report 2022 sistema.com Sistema’s investment thesis: key criteria for selecting new investment projects and assets: Adapting to the new macro environment The macro environment changed significantly in 2022. As a result, many new investment opportunities for major M&A deals and partnerships emerged in the Russian market. We also see more attractive terms for the purchase of new assets, higher volume of state support measures and preferential financing, and improved protection of the domestic market and its participants. Over a strategic horizon, the Corporation expects new opportunities for growth and consolidation of its current portfolio assets and emergence of new areas for investment. For the Corporation’s assets, there is increased importance of retaining and further increasing operational efficiency, resilience to new constraints of the micro environment and the long-term profitability of the chosen business models. Management model: how the Corporation manages assets and creates value Sistema has adopted a partnership management model that allows the Managing Partners to share the risks and returns from investment activities with the shareholders. Managing Partners are responsible for implementing the strategies of portfolio companies. In most cases, Managing Partners chair the boards of directors of portfolio companies and are in charge of forming the board and organising its work. They also bear responsibility for the recruitment and appointment of top management, and for the establishment of an effective system of corporate governance. The Corporation’s functions and departments advise, when necessary, respective departments of portfolio companies as part of forming development strategies, preparing key investment projects for assets, raising debt and equity financing, developing long-term incentive plans, forming optimum legal and tax structures, implementing corporate governance standards and improving security systems, thereby contributing to the long-term sustainable value creation and business growth of the Corporation’s portfolio assets. Due to the high diversification of its investment portfolio, the updating of strategic plans and investment projects, the reallocation of investment resources, and the timely adjustments and optimisations to operational and financial plans, the Corporation continued profitable growth of its business. In the long term, many of the Corporation’s assets have a window of opportunity for import substitution, localisation of technologies and manufactured products, strengthening of market leadership, and growth of cooperation and integration with major Russian corporate and governmental customers. The Corporation and its assets actively initiate the development and implementation of new investment projects that consider new market and macro conditions. Investment process: taking investment decisions Sistema relies on its practical experience and focuses on the following types of transactions when entering new assets: Strategic investments in creating leaders Turning around distressed companies Non-cash deals with retained control High-risk investments Monopoly, government contracts TYPE OF TRANSACTION Buy & build Special situations Smart deals VC funds GR deals transaction amount: target returns +ESG criteria stake in the business RUB 25 % 1,000,000,000 IRR 30 % over 3–6 years Cash-on-cash 2✘ Ruling out toxic industries Taking into account ESG profiles when making investment decisions 20 21 SISTEMA PJSFC Annual report 2022 sistema.com Performance of the Corporation Asset management principles Investing in the development of existing portfolio assets in order to increase their value and receive dividends is one of the key stages of Sistema’s value creation model The key element of Sistema’s management model is the idea of transformation and creation of industry champions. The Corporation has an efficient process that allows the initial investment idea to be implemented as part of an asset development strategy for up to 5 years, followed by a strategic plan with key development projects for 3 years and a roadmap with a detailed action plan (for 12–24 months), KPIs (key performance indicators), budget and financial targets for a calendar year. Continuously and comprehensively assessing the company’s performance and contributions of its board of directors and management team. This process ensures that the asset is managed in accordance with the Corporation’s strategic goals and principles. The governance model is based on the elements that are the same for all the Group members: 1 Strategic planning 2 Finance: budget, monitoring, control 3 Approval of important projects 4 Corporate governance standards 5 HR management Corporate Centre Assets Board of Directors +Committees Board of Directors +Committees President Management Board Portfolio Management Teams Functions President Management Board Subdivisions Value creation in assets: Forming the boards of directors of portfolio companies that include independent directors with recognised industry and functional expertise. The boards of directors support the management of portfolio companies in making key decisions on the areas of development and oversee the quality of execution and the results of decisions made. Forming a best-in-class, efficient management team, establishing strategic goals and an incentive system for it, and determining a strategic development plan, efficient operating management model and required resources. Identifying new technologies and advanced work tools to increase profitability and accelerate growth at the company. Developing innovative products and services, improving their quality, entering new markets and attracting new customers. Introducing the processes of strategic, financial and operational planning and control and best international practices of investment and project management. 1 2 3 4 5 23 Performance of the Corporation 22 SISTEMA PJSFC Annual report 2022 sistema.com Responsible investment and ESG principles Responsible investment is an integral element of Sistema’s investment strategy and long-term success. It means that at all stages of its investment activities and asset ownership the Corporation takes into account not only financial and operating aspects but also significant environmental, social and governance (ESG ) factors to create long-term value for shareholders and other stakeholders. Since 2020, the investment criteria approved by the Corporation’s Board of Directors included ESG factors reflecting the Corporation’s guiding principles on responsible business conduct and international ESG standards, which solidified Sistema’s strategic approach to responsible investment. At the portfolio building stage, Sistema excludes “sin stocks”, which is consistent with the Corporation’s established investment culture, and also considers the ESG profiles of acquisition targets in other industries when making investment decisions. Information disclosure, self- assessment and development of a sustainability strategy HR Corporate governance Finance IT Sustainable development Implemented by assets Assistance provided to assets ▪ Management Incentive System ▪ Organisational structure + standard agreements ▪ Corporate governance system ▪ Board of Directors ▪ Budgeting cycle ▪ Financial planning and control ▪ Management dashboard ▪ Risk management ▪ Information disclosure (if necessary) + + + + + + Personnel recruitment Debt portfolio, taxes, reporting Strategy ▪ Strategic cycle ▪ Investment process Investments analysis Support on legal matters, support for M&A deals IT Audit, development of IT strategy, increasing digitalisation, etc Governance model, including persons in charge and internal regulations To learn more about responsible investment and sustainability management, please refer to the section “Sustainability management”. Sistema’s indirect ESG impact through its portfolio assets is more significant than the direct one. Therefore, at the stage of asset management the Corporation makes efforts to promote the following principles in Sistema Group companies through their governance bodies using established corporate procedures: ▪ Compliance with high standards of corporate governance and principles of responsible business conduct; ▪ Improvement of their sustainability management approaches and performance indicators; ▪ Minimisation of negative and maximisation of positive impact through innovation, services, products and investments in local communities. 24 25 SISTEMA PJSFC Annual report 2022 sistema.com Performance of the Corporation Net profit atributable to Sistema, RUB bn 16.8 19.4 2021 2022 +15.8% 1 Hereinafter, adjusted OIBDA is are used to evaluate the financial performance of the Corporation and Sistema Group companies and represent underlying financial measures adjusted for a number of one-off gains and losses that are not related to business operations. 1 The Group’s financial performance adjusted for accruals related to the LTI programme at portfolio companies and the impairment of assets, as well as for other one-off expenses. 2 Includes the economic effect of the consolidation of Etalon Group and YIT Russia. 3 The Corporate Centre’s financial liabilities net of cash and cash equivalents are presented based on management accounts. 4 RUB bond series 001Р-1/4/6/11/14/16/18, in 2023; series 001Р-5/8/12/13/15, in 2024; series 001P-7/10/17/19/24, in 2025; series 001P-9/20/21/22/23, in 2026. Financial overview Consolidated financial results 1 RUB m 2022 2021 Change, % Revenue 912,656 773,218 18.0 OIBDA 309,151 288,888 7.0 Adjusted OIBDA 310,447 264,668 17.3 Operating income 161,247 155,819 3.5 Net profit atributable to Sistema 19,405 16,757 15.8 In 2022, Sistema’s consolidated revenue increased by 18.0% year- on-year to RUB 912.7bn due to the consolidation of Etalon Group’s results since May 2022 as well as higher revenue at a number of key assets: The Corporate Centre’s net financial liabilities 3 increased by 16.2% year-on-year to RUB 245.2bn. The change in the amount of outstanding financial liabilities was due to the borrowing of RUB 95.6bn in bank loans and bonds as well as the repayment of loans and bonds in the amount of RUB 72.0bn. The Corporate Centre’s cash balance was RUB 9.8bn. As of 31 December 2022, RUB-denominated liabilities accounted for 99% of the Corporate Centre’s financial liabilities. Bonds accounted for 70% of the Corporate Centre’s debt as of the end of 2022, down from 82% at the end of 2021. The weighted average rate on bonds in the debt portfolio was 8.02% at the end of 2022. Revenue, RUB bn 773.2 912.7 2021 2022 +18.0% Adjusted OIBDA, RUB bn 264.7 310.4 2021 2022 +17.3% 30 70 The Group’s adjusted OIBDA 1 rose by 17.3% year-on-year to RUB 310.4bn in 2022 following the growth in revenue of the Corporation’s key assets, as well as on the back of the consolidation of the results of Etalon Group 2 . In 2022, Sistema’s net profit increased by 15.8% year-on- year to RUB 19.4bn, mainly due to the growth in OIBDA and the economic effect of the consolidation of Etalon Group and YIT Russia. Sistema Group’s capex decreased by 5.2% to RUB 158.6bn in 2022 due to forward investments on the part of key portfolio companies in prior periods. The total investment of the Corporate Centre in 2022 amounted to RUB 51.9bn. The Group’s net debt at the end of 2022 totalled RUB 946.7bn. Structural analysis of total financial liabilities, % Corporate centre’s debt portfolio overview Bank loans and other Local bonds with a put option 4 RUB bonds Loans and other debt RUB bn 255 Schedule for repayment of financial liabilities of the Corporate Centre, RUB bn 2023 2024 2025 2026 64.6 66.8 62.0 61.6 42.3 22.3 44.1 22.7 47.7 14.3 45.1 16.5 Revenue growth leaders in 2022, % YoY 15 20 46 +2.6 % +15.5 % +11.5 % +19.6 % +46.4 % due to continued growth in the telecom, fintech and media business verticals. thanks to a record harvest and a substantial increase in milk production. due to the growth in production and sales of sawn timber. as a result of a significant increase in sales in the retail and export segments. thanks to the active expansion of the medical chain as well as an overall increase in patient flows. 26 27 SISTEMA PJSFC Annual report 2022 sistema.com Performance of the Corporation 1 In April 2021, Sistema Finance Holding S.A. issued Capgrowth, a Sistema subsidiary, a foreign-currency loan in the amount of EUR 44.4 million, with maturity in December 2025. In 1H 2022, Sistema completely divested from Sistema Finance Holding S.A. and stopped consolidating it, thus making the loan an external borrowing for the Group. The loan balance as of the end December 2022 amounted to EUR 29 million. 2 Including the total volume of borrowings with the exception of cash and cash equivalents at the Corporate Centre level. The Corporate Centre’s financial liabilities, RUB bn OIBDA represents operating income before depreciation and amortisation. OIBDA margin is defined as OIBDA as a percentage of our net revenues. Our OIBDA may not be similar to the OIBDA measures of other companies; is not a measurement under accounting principles generally accepted under IFRS and should be considered in addition to, but not as a substitute for, the information contained in our consolidated statement of profit and loss. We believe that OIBDA provides useful information to investors because it is an indicator of the strength and performance of our ongoing business operations, including our ability to fund discretionary spending such as capital expenditures, acquisitions of businesses and other investments and our ability to incur and service debt. While depreciation and amortisation are considered operating costs under IFRS, these expenses primarily represent the non-cash current period allocation of costs associated with long-lived assets acquired or constructed in prior periods. OIBDA is commonly used as one of the bases for investors, analysts and credit rating agencies to evaluate and compare the periodic and future operating performance and value of companies. The following table presents a reconciliation of OIBDA to operating income for the periods indicated: Alternative performance measures Operating income before depreciation and amortisation (OIBDA) and OIBDA margin The Company uses adjusted OIBDA and adjusted operating income to evaluate the financial performance of the Group. These represent underlying financial measures adjusted for a number of one-off gains and losses. We believe that adjusted measures provide investors with additional useful information to measure our underlying financial performance, particularly from period to period, because these measures are exclusive of certain one-off gains and losses. 2022 2021 Operating income 161,247 155,819 Accruals related to LTI programme at portfolio companies 806 2,536 Revaluation of equity investment in the consolidation of pharmaceutical assets – (25,327) Impairment of non-current assets and other non-recurring loss /(profit), net 489 (1,430) Adjusted operating income 162,542 131,599 Depreciation and amortisation 147,905 133,069 Adjusted OIBDA 310,447 264,668 We define consolidated net debt as consolidated total debt less cash, cash equivalents and deposits in banks. Consolidated total debt is defined as total borrowings plus finance lease. The total borrowings are defined as long-term and short-term borrowings. We believe that the presentation 31 December 2022 31 December 2021 Long-term borrowings 762,219 641,511 Short-term borrowings 298,846 209,306 Total borrowings 1,061,065 850,817 Consolidated finance lease 1 20,250 2 21,171 3 Consolidated total debt 1,081,315 871,988 Cash and cash equivalents (134,402) (81,883) Deposits in banks (200) (1,569) Consolidated net debt 946,713 788,536 RUB m 2022 2021 Operating income 161,247 155,819 Depreciation and amortisation 147,905 133,069 OIBDA 309,152 288,888 Adjusted operating income and adjusted OIBDA can be reconciled to our consolidated statements of profit and loss as follows: Adjusted OIBDA and operating income Consolidated net debt Consolidated net debt can be reconciled to the borrowings as follows: 31 Dec 21 229.4 30 Sep 22 31 Dec 22 +42.8 (33.7) (38.3) 245.9 255.0 +54.8 Corporate Centre debt Net financial liabilities 2 New debt raised 1 Repayment of liabilities 1 In accordance with the standard IAS 17. 2 Including RUB 1,737 m of short-term finance lease. 3 Including RUB 1,847 m of short-term finance lease. 211.1 230.3 245.2 of consolidated net debt provides useful information to investors because we use this measure in our management of consolidated liquidity, financial flexibility, capital structure and leverage. 28 29 SISTEMA PJSFC Annual report 2022 sistema.com Performance of the Corporation Securities Type of securities Shares (ordinary) GDRs Registration number 1-05-01669-A - ISIN RU000A0DQZE3 US48122U2042 Ticker AFKS SSA Primary trading platforms Moscow Exchange London Stock Exchange Securities and share capital Shareholders’ equity Shareholding structure at the end of the calendar year, % Name 2020 2021 2022 V. Evtushenkov 59.2 59.2 49.2 Ordinary shares, free float 25.0 26.1 29.6 GDRs, free float 6.9 5.6 2.7 Shares held by Sistema Group companies 1.4 2.6 2.4 Shares held by members of the Board of Directors and the Management Board of Sistema 7.5 6.5 16.1 Number of individual shareholders, thsd people 2020 2021 2022 133 224 265 265,113 legal entities, including trust managers. The list of shareholders with non-zero balances on personal accounts as of 31 December 2022 included: individuals; 1,046 Sistema conducted an initial public offering in 2005. Its shares are traded on the London Stock Exchange in the form of global depositary receipts (GDRs) under the ticker symbol “SSA.” One GDR represents 20 ordinary shares. The Corporation’s ordinary shares are also listed on the Moscow Exchange in the first listing level under the ticker symbol “AFKS.” As of the end of 2022, free float totalled 32.3% of equity: about 2.7% of shares were traded as GDRs on the London Stock Exchange and 29.6% on the Moscow Exchange. At the beginning of 2022, following an escalation of the geopolitical situation, the LSE, as well as the NYSE and NASDAQ, suspended trading in most Russian stocks, including the depositary receipts of the Corporation and its portfolio companies. In May 2022, the Government Commission on Monitoring Foreign Investment in the Russian Federation approved Sistema’s application and allowed trading in its depositary receipts outside Russia till 13 May 2023. Earlier, Federal Law No 114-FZ dated 16 April 2022, which came into force on 27 April 2022, had prohibited placement of and trading in Russian issuers’ depositary receipts on foreign stock exchanges. On 13 April 2023, Sistema announced its intention to terminate the Regulation S Deposit Agreement and Rule 144A Deposit Agreement (“the Deposit Agreements”), under which its Regulation S Global Depositary Receipts and Rule 144A Global Depositary Receipts (“GDRs”), respectively, had been issued. The Corporation has instructed the GDR Depositary, Citibank, N.A., to terminate the Deposit Agreements with an anticipated termination date of 14 May 2023. Sistema has applied to the UK Financial Conduct Authority (“FCA”) to cancel the listing of the Corporation’s Regulation S GDRs (ISIN US48122U2042) and Rule 144A GDRs (ISIN US48122U1051) on the FCA’s Official List, and to the London Stock Exchange to cancel the admission of the GDRs to trading on the London Stock Exchange’s Main Market for listed securities (together, “the Delisting from LSE”). Following the Delisting from LSE, trading in Sistema’s ordinary shares will continue on the Moscow Exchange and the SPB Exchange under the ticker AFKS. Sistema is the largest shareholder in four public companies: MTS PJSC (MTSS ticker symbol on the Moscow Exchange and MBT on the New York Stock Exchange), Segezha Group PJSC (SGZH ticker symbol on the Moscow Exchange), Etalon Group PLC (ETLN ticker symbol on the Moscow Exchange and the London Stock Exchange) and Ozon Holdings PLC (OZON ticker symbol on the Moscow Exchange and the NASDAQ). Due to the above mentioned Federal Law No 114- FZ and the resolution of the Government Commission on preservation of MTS’s American depositary receipts (ADR) programme till 12 July 2022, the procedure of ADRs delisting from the New York Stock Exchange was set in motion. Under the terms of the depositary agreement, conversion of MTS’s ADRs into ordinary shares was to be completed within six months from 12 July 2022, i.e. on 12 January 2023. The Moscow Exchange includes Sistema’s share prices in the calculation base of its key indices (MOEX and RTS), as well as its Broad Market Index and the Small and Medium Capitalisation Index. The Moscow Exchange includes Sistema’s share prices in the calculation base of its key indices (MOEX and RTS), as well as its Broad Market Index and the Small and Medium Capitalisation Index. MOEX Index IMOEX MOEX Broad Market Index MOEXBMI MOEX SMID Index MCXSM RTS Index RTSI Sistema’s share capital is divided into 9,650,000,000 ordinary shares with a nominal value of RUB 0.09 each. Its authorised capital is RUB 868,500,000. 30 31 SISTEMA PJSFC Annual report 2022 sistema.com Performance of the Corporation Sistema’s average daily trading volume on the Moscow Exchange, RUB m Source: Moscow Exchange Dividend policy In May 2021, the Board of Directors approved a new Dividend Policy that established the recommended dividend amount for 2021-2023. In accordance with the Policy, the recommended dividend amount is at least RUB 0.31 per ordinary share in 2021, at least RUB 0.41 per share in 2022 and at least RUB 0.52 per share in 2023. Thus, based on the current number of the Corporation’s ordinary shares, the recommended total dividend payout is ~RUB 3bn in 2021, ~RUB 4bn in 2022 and ~RUB 5bn in 2023. Dividend payout for 2021 Taking into account the remaining market volatility and the need to prioritise the Corporation’s financial stability and sufficient liquidity, the Annual General Meeting of Sistema’s shareholders held on 15 August 2022 decided not to pay dividends for 2021. Unpaid dividends As of 31 December 2022, the total amount of unpaid dividends equalled RUB 856,289.6: not paid due to the lack of the necessary information about the recipients of dividends to transfer the corresponding amounts. 1 Price on Sistema GDRs’ suspension date (2 March 2022) Results of trading in shares and GDRs on stock exchanges 2018 2019 2020 2021 2022 Sistema shares on the Moscow Exchange Year low, RUB 7.7 8.0 10.8 21.8 10.1 Year high, RUB 12.8 16.2 33.6 38.0 24.6 Year-end price, RUB 8.0 15.2 28.6 23.4 11.9 Year-end market cap, RUB bn 77.2 147.0 276.4 226.2 115.1 Sistema GDRs on the London Stock Exchange Year low, USD 2.2 2.3 2.7 5.9 2.0 Year high, USD 4.5 5.0 8.7 10.0 6.0 Year-end price, USD 1 2.3 4.9 7.7 6.2 4.5 Year-end market cap, USD bn 1.1 2.4 3.7 3.0 2.2 Source: Bloomberg, PJSC Moscow Exchange As the geopolitical situation aggravated and new sanctions were introduced against Russia, the price of Sistema’s ordinary shares fell by 49.1% in 2022. The main indicator of the Russian stock market, the MOEX Index, lost 43.1% in the reporting year. Sistema’s market cap as of the end of 2022 was RUB 115.1bn. Share prices of Sistema and its publicly traded assets, % -80% Jan Feb Mar Apr Jun Jul Aug Sep Oct Nov Dec -70% -60% -50% -40% -30% -20% -10% 0% 10% 20% Segezha shares OZON shares Etalon shares IMOEX MTS shares Sistema shares -21.1% -38.4% -43.1% -45.8% -49.1% -58.7% 2018 158 243 1,123 1,164 2019 2020 2021 239 2022 Source: Moscow Exchange The geopolitical risks, sanctions, price volatility, inflation and other factors had a significant influence on all players of the Russian stock market in 2022. On the first trading day of 2022, the closing price of Sistema’s ordinary shares was RUB 23.4 per share, but at the end of Q1 it plunged to RUB 13.9, hitting a low of RUB 10.1 on 7 October. On the last trading day of 2022, the closing price was RUB 11.9. The full text of the new Dividend Policy is available on the Corporation’s website. As a result of restrictions on sale of Russian companies’ shares by non- residents that were introduced by the Russian Central Bank, liquidity of Sistema’s shares shrank significantly: the average daily trading on the Moscow Exchange in monetary terms decreased from RUB 1.164m in 2021 to RUB 239m in 2022. Dividends and share buyback programme 1 Operating income before depreciation and amortisation. 2 All financial indicators used to determine the amount of dividends are determined in accordance with the Corporation’s consolidated financial statements prepared in accordance with International Financial Reporting Standards. Additionally, starting from 2022, the Policy also recommends increasing dividend payments by an amount equal to 10% of the absolute increase in adjusted OIBDA 1 for the last completed financial year, provided that adjusted OIBDA grew by more than 5% in the last completed financial year and the net debt 2 /adjusted OIBDA ratio does not exceed 3x. 32 33 SISTEMA PJSFC Annual report 2022 sistema.com Performance of the Corporation 1 Date of payment of dividends to the nominee shareholders and custodians being professional participants of the securities market, who are included in the shareholders register. 2 Date of payment of dividends to other persons included in the shareholders register. Bond issues placed in 2021-2022: Date of placement ISIN Security Volume, RUB bn Coupon, % Coupon frequency Interest rate type 01.03.2021 RU000A102SV8 Sistema PJSFC, 1P 18 5 6.90% Quarterly Fixed 01.03.2021 RU000A102SX4 Sistema PJSFC, 1P 19 13 7.35% Quarterly Fixed 12.05.2021 RU000A103372 Sistema PJSFC, 1P 20 10 8.20% Semi-annual Fixed 05.07.2021 RU000A103C95 Sistema PJSFC, 1P 21 15 8.40% Semi-annual Fixed 13.09.2021 RU000A103P33 Sistema PJSFC, 1Р 22 15 8.20% Quarterly Fixed 03.12.2021 RU000A104693 Sistema PJSFC, 1Р 23 5 9.95% Quarterly Fixed 07.12.2022 RU000A105L27 Sistema PJSFC, 1Р 24 10 10.00% Quarterly Fixed Detailed information on debt instruments is available on the Corporation’s website. For more information on credit ratings of the portfolio companies, see the Corporation’s website. Bonds Total amount of declared dividends Dividend per share Declaration date Payment date 2021 (for FY 2020) 2,991,500,000 0.31 26.06.2021 28.07.2021 2020 (for FY 2019) 1,254,500,000 0.13 27.06.2020 29.07.2020 2019 (for FY 2018) 1,061,500,000 0.11 29.06.2019 31.07.2019 2018 (for FY 2017) 1,061,500,000 0.11 30.06.2018 31.07.2018 2017 (for 9M 2017) 6,562,000,000 0.68 28.11.2017 22.12.2017 1 19.01.2018 2 2017 (for FY 2016) 7,816,500,000 0.81 24.06.2017 28.07.2017 2016 (for H1 2016) 3,667,000,000 0.38 23.09.2016 20.10.2016 2016 (for FY 2015) 6,465,500,000 0.67 25.06.2016 27.07.2016 Share buyback programme In September 2019, the Corporation launched a RUB 3bn share buyback programme. In June 2021, Sistema increased the volume of its share buyback programme to RUB 7.0bn and extended it until 17 September 2022. The buyback under the programme was carried out by Sistema’s subsidiary Sistema Finance JSC. Sistema is one of the largest issuers of corporate bonds in Russia. The Company uses bond proceeds to refinance its debt portfolio and implement its investment programme. Dividend amounts and payment dates, RUB In September 2022, the Expert RA rating agency confirmed Sistema’s credit rating at ruAA-. The outlook was changed from “positive“ to “stable”. As Expert RA pointed out, Sistema’s investment strategy, which is based on systemic development and upscaling of assets and prompt adaptation to current market conditions, ensures consistent and organic growth of the Corporation’s investment assets. Expert RA does not see any significant risks related to refinancing of forthcoming mandatory debt payments due to the sufficient amount of credit facilities available that were increased in the reporting period and are several times larger than the debt payments due. The agency continues to estimate the Corporation’s foreign currency risks as low. All of Sistema’s liabilities are in roubles and are also highly diversified in terms of lenders. Expert RA also acknowledged the high quality of Sistema’s corporate governance, risk management and great transparency regarding the disclosure of financial information. The change of the outlook from “positive“ to “stable“ was due to the decrease of the market capitalisation of listed assets, which was caused by deterioration of the general macroeconomic situation and negative trends of the entire Russian financial market, the agency said. In Q1 2022, the international rating agencies Standard & Poor’s and Fitch revoked the ratings of Russia and Russian companies, including Sistema. Credit rating in 2022 By the end of January 2022, the Programme was implemented in full. Since the announcement of the programme, Sistema Finance JSC acquired 315,195,371 ordinary shares of the Corporation, which represents 3.27% of outstanding Sistema shares, for an aggregate amount of approximately RUB 7bn. 34 35 SISTEMA PJSFC Annual report 2022 sistema.com Performance of the Corporation 36 37 SISTEMA PJSFC Annual report 2022 sistema. com Results of key assets RESULTS OF KEY ASSETS 38 MTS 48 Ozon 54 Segezha Group 76 Etalon Group 84 MEDSI 98 Steppe AgroHolding 108 Binnofarm Group 116 Other consolidated assets mts.ru of Russia's population is covered by LTE % % growth in the number of MTS Premium subscribers 71 8 0 + > monthly active users of My MTS app among mobile operators by M2M/IoT connections2 m m No thsd thsd pay TV subscribers retail outlets 5.3 26 1 > > > > 11 corporate / SME customers of MTS cloud business 4 mobile subscribers in Russia, the Republic of Belarus and the Republic of Armenia 88 m Business model Ecosystem core Satellites 7 growth points B2C & B2B Telecom-light Cloud Business New products still developing within the Core due to their small size and uncertainty, can potentially increase their business size in future, carve out from the core and become satellites (or become deeply integrated into the core and, thus, inseparable from it) Media Retail Marketer Auto Live Travel Smart Home Cybersecurity AI % Sistema's effective stake1 Fintech MTS is a digital ecosystem and Russia's leading provider of mobile and fixed-line communication services, data transfer and Internet access, cable and satellite TV broadcasting, digital services, including fintech and media, and IT solutions in the area of communication platforms, the Internet of Things, automation, monitoring, data processing, cloud computing and information security. Constitute stand-alone value for external investors, and the Group is ready (in theory) to transition from a controlling to a minority shareholder Mutual reinforcement with the Core: services and resources of the core – services and competences of a satellite Inseparable part, fully and indefinitely to be controlled by the Group Value is subject to success of the ecosystem operating as a single mechanism (particularly in regard to revenue streams generated by services provided to satellites and partners) 1 Effective ownership as of 10 April 2023. 2 ONSIDE study “Competitive analysis: IoT, Q3 & Q4 2022” MTS 39 Results of key assets 38 SISTEMA PJSFC Annual report 2022 sistema.com 1 Source: TMT Consulting Industry overview for 2022 Source: TMT Consulting In 2022, the telecom market exceeded RUB 1.8tn. The market grew by 1.5% (one of the lowest growth rates in recent years, with the exception of 2020). The mobile market has historically been the key growth driver, accounting for 59% of industry revenues (+3.5% in 2022 vs +5.0% in 2021). At the same time, a slowdown continued in such important segments as broadband Internet (+0.5% in 2022 vs +4.5% in 2021) and pay TV (+0.7% in 2022 vs +2.3% in 2021): subscriber base growth rates in both markets were modest and price increases were substantially offset by the further spread of bundled offers. In 2022, the company's mobile subscriber base (active SIM cards) went down 0.9%, to 256m, with mobile phone penetration at 175%. In absolute terms, the company lost 2m subscribers. This is not the first time that there has been a decline as it happened previously in 2018 and 2020. Operators have shifted their priorities from acquiring new customers to increasing the loyalty and the average cheque of existing customers; the decrease was also due to the write- off of some subscribers for the implementation of the Federal Law No 533-FZ. Mobile revenue in 2022 grew by 3.5% compared to 5.0% in the previous year. The key growth drivers were higher prices and growing consumption of ancillary services, which increased revenues in both B2C and B2B. Growth in 2023 is expected to be close to that of 2022. Non- telecom products in the IT and media markets will be the key growth driver for telecom operators. However, communication services will continue to be the backbone of their business for the foreseeable future. In March 2022, the government's measures aimed at addressing sanctions and supporting the telecom and IT industries took effect. On 2 March 2022, the Russian President issued an order exempting IT companies from income tax until 31 December 2024. At the end of March 2022, the Russian government also approved measures aimed at supporting the telecom sector, including a moratorium on implementation of the “Yarovaya Law” by telecom operators, introduction of a mechanism for phased indexation of tariffs by operators to match inflation rates, shared use of communication infrastructure by operators as part of inter-network roaming, one-year suspension of regulations requiring operators to ensure LTE coverage on federal highways and in small residential communities. Moreover, the Ministry of Digital Development took steps aimed at retaining software developers and creating favourable conditions for IT companies. In 2022, MTS continued to implement its long-term business strategy of developing an ecosystem of digital products based on a robust telecom platform, but adapting to the new economic environment amid geopolitical tensions became the main factor affecting the company's business. The high level of external uncertainty continues to affect both the economic situation in Russia (including household incomes) and the issue of supplies of foreign equipment. Key trends on the Russian telecom market RUB 1.8 the telecom market's value in 2022 Telecoms market in Russia Russian telecoms market structure, % Overall telecoms Mobile services Broadband internet access Pay TV Fixed telephony Inter-operator services Legal framework & regulatory change Macroeconomic factors that influenced the company's business in 2022 3.5 5.0 4.5 2.3 –8.3 –0.7 3.5 0.5 0.7 –8.5 –7.5 1.5 2022 Growth rate, % 2021 Revenue, RUB bn 2017 2018 2019 2020 2021 2022 1,641 2.7 3.3 2.6 0.5 3.5 1.5 1,694 1,739 1,747 1,808 1,835 tn 40 41 SISTEMA PJSFC Annual report 2022 sistema.com Results of key assets Sustainable development Business development in 2022 Communications In 2022, MTS's revenue from communication services in Russia increased by 4.6% to RUB 435.6bn, which was driven by growing consumption of services in both mobile and fixed-line segments. Significant growth was achieved by the advertising business (bulk SMS messages, targeted ads), where revenues increased by 22% year-on-year. In 2022, despite challenging macroeconomic conditions, MTS saw stable demand for communication services from both retail and corporate customers and growing popularity of MTS Premium and MTS Cashback; the company continued to launch new products and invest in new segments, some of which showed double-digit revenue growth rates. Network development In January 2022, MTS launched the world's first uplink aggregation tests on a pilot 5G network based on virtualisation of network functions in vRAN. vRAN solutions can be broadly used in 5G networks and Open RAN architecture. In May, MTS announced that it had leveraged artificial intelligence (AI) for mobile network planning in all regions of Russia. The use of AI in big data analytics will make it possible to predict the potential return on investment in regional telecom infrastructure development with an accuracy of over 75% and improve the quality of signal. In June 2022, MTS launched MTS Remote Play, a service for remote use of computational capabilities via wired and mobile networks based on edge computing technologies. In November 2022, MTS announced its transition to The Platform, an IT platform that unites all end-to-end IT solutions within the MTS ecosystem. Private LTE network projects In December 2022, MTS announced the deployment of a dedicated industrial LTE network for one of the world's largest nickel and palladium producers. The LTE network will optimise ore loading and movement of quarry vehicles and machinery, reduce haul time and downtime, and improve industrial safety. In January 2023, MTS deployed Russia's largest dedicated industrial LTE network for a Russian coal-mining holding company. The use of LTE mobile communication technology made it possible to expand coverage considerably, improve the quality of voice services, increase the speed of data transmission, ensure the security of communication channels and enable the exchange of multimedia messages. In April 2022, MTS launched the MONTE (Monitoring Events) service on the company's NB-IoT network, the first offering of its kind in Russia for enabling remote monitoring of subscriber devices over narrow-band Internet of Things connectivity. In June 2022, MTS launched a cloud CCTV service in the form of a flexible out-of-the-box solution that allows corporate customers to quickly set up 24/7 video monitoring at any facility with minimum equipment and costs. In August 2022, MTS announced the launch of Smart Lock, Russia's first domestic IoT solution to manage keyless access to secured facilities. In December 2022, MTS migrated its MTS IoT Hub to in-house software, which will fully replace foreign solutions used in the development of NB-IoT products. In January 2023, MTS announced the launch of MTS Exolve, a cloud platform to create communication services quickly and flexibly. Cloud solutions and the Internet of Things Other areas for development In July 2022, MTS acquired a controlling stake in Webinar Group (Webinar Meetings, Webinar.ru, We.Study and COMDI), Russia's largest developer of solutions for video meetings, webinars and online events. In August 2022, MTS Corporate Venture Fund invested in Belarusian startup LogicLike, an online educational platform for developing logic and thinking in children. In May 2022, the Government Commission on Monitoring Foreign Investment in the Russian Federation approved MTS’s request to maintain its American Depositary Receipt (ADR) programme and allowed MTS to continue the trading of the company's ADRs outside of Russia until 12 July 2022 (inclusive). In June, MTS sent an application to JPMorgan Chase Bank, N.A., the depositary bank under the existing ADR programme, to terminate the deposit agreement effective 13 July 2022. In August, MTS received a notice from the New York Stock Exchange that its ADRs were delisted on 8 August 2022. Under the terms of the deposit agreement, the guarantee period for converting MTS ADRs into ordinary MTS shares was to be completed within six months after 12 July 2022, i.e., by 12 January 2023. In August 2022, MTS submitted a notice to LLC CB J.P. Morgan Bank International to start automatic conversion of ADRs into MTS ordinary shares as required by Russian law. Delisting from the New York Stock Exchange (NYSE) In March 2022, MTS announced the establishment of an ESG Centre to implement the corporate ESG strategy, replicate best ESG practices, and manage a portfolio of commercial projects addressing social and environmental problems. In October 2022, MTS joined the group of leading companies of the first ESG index of Russian business prepared by RBC and National Credit Ratings. As a result of the assessment, MTS became the only digital company with the highest environmental, social and governance score. In December 2022, the AK&M rating agency assigned MTS the highest sustainability rating of A++ with a stable outlook. This is MTS’s first local ESG rating in Russia. In January 2023, MTS was ranked among the leaders of the “Responsibility and Openness” ESG Index published by the Russian Union of Industrialists and Entrepreneurs (RSPP). + 22 % growth of the advertising business (bulk SMS messages, targeted ads) 42 43 SISTEMA PJSFC Annual report 2022 sistema.com Results of key assets MTS Media's revenue in 2022 increased by 15.6% year- on-year to RUB 15.9bn, driven by the active development of the streaming service KION, regular releases of original content (KION Originals) and growing customer base. In May 2022, MTS Media launched a new TV channel, KION HIT. The TV channel, which is available only through the MTS ecosystem, broadcasts the first episodes of projects from KION Originals, as well as other Russian and foreign films and TV shows. In November 2022, MTS Media announced the launch of two new TV channels of its own production, FamilyJam and DetectiveJam. Both channels are available in HD for users of all MTS services: KION, home TV and satellite TV. MTS retail chain's revenue in 2022 decreased by 34% year-on-year to RUB 57bn amid restrictions imposed on equipment imports. However, lower sales of handsets and accessories did not put pressure on the retail chain's OIBDA, which increased by 20.5% year-on-year due to higher-margin goods and services. In February 2023, MTS became the first Russian retailer to launch sales of the Samsung Galaxy S23 in Russia. The smartphones are available for purchase in Moscow stores and at shop.mts.ru. Satellite Growth points In July 2022, MTS announced the acquisition of 100% in Bronevik Group, one of Russia's leaders in the online hotel booking market, to develop a new business segment, MTS Travel. The service currently offers tens of thousands accommodation options in Russia and hundreds more in the CIS and other countries. In November 2022, MTS Travel launched a hotel booking service at travel.mts.ru. In the future, the platform will combine several technological products from MTS and its partners, and will help organise independent travel: from transport tickets to tours and entertainment options. In February 2023, MTS Travel was integrated into the MTS Cashback programme, allowing customers to get up to 10% cashback on hotel reservations. ̛̀͑̀͆͊ ̗̹̀̿ͅ МТ S Travel In April 2022, MTS announced a deal to acquire JSC Gulfstream Security Systems, one of the leaders in the Russian security market, for the development of MTS Smart Home, a new business segment. MTS acquired a 58.38% stake in the company for RUB 2bn. Smart Home AI In October 2022, MTS AI developed SuperResolution, a solution for converting videos to 4K, and an algorithm for skipping title sequences and end credits in TV shows for KION. In January 2023, MTS AI and Stroki, a platform offering e-books, audiobooks and podcasts, launched a project for creating up to 10,000 audiobooks narrated by artificial intelligence. In October 2022, MTS PJSC and MTS Auto LLC, a wholly- owned subsidiary of MTS, announced an investment in Navitel Group, a Russian provider of navigation and mapping solutions. The deal will allow MTS to develop its own geo-platform for ecosystem services and transport solutions. МТS Auto In April 2022, MTS Corporate Venture Fund invested RUB 72m in Bartello, an online food and beverage ordering service. The company plans to enable online orders in the MTS Live app at concert venues, music festivals and open-air events. In September 2022, MTS Entertainment signed management agreements for Music Media Dome, a multimedia space in Moscow, and M-1 Arena, a live music and sports complex in St Petersburg. The venues will become part of the MTS Live federal chain and will be renamed MTS Live Hall in Moscow and MTS Live Arena in St Petersburg. Under the signed agreements, MTS Entertainment will be responsible for all operational management of the venues: organisation of concerts, use of venues for events and shows, ticket sales, bar and restaurant operations, sponsorships, and advertising integrations. МТS Live Fintech’s 2022 revenues grew 40% year-on-year to RUB 68bn. Fintech’s OIBDA was RUB 5.0bn in 2022. The bank’s retail loan portfolio increased by 24.4% from the end of 2021 to RUB 255.8bn, with the cost of risk (CoR) at 10% in 2022. The number of the bank's active customers increased to 3.5m, while the penetration of remote banking services in the Bank's customer base reached 80% by the end of 2022. 44 45 SISTEMA PJSFC Annual report 2022 sistema.com Results of key assets Development strategy and results of CLV 2.0 strategy Financial results, RUB m 2022 2021 Change, % Revenue 541,749 527,921 2.6 Adjusted OIBDA 1 224,207 229,381 (2.3) Operating income 109,437 118,005 (7.3) Adjusted net income attributable to Sistema 16,540 32,003 (48.3) In 2022, MTS’s revenue increased by 2.6% year-on-year to RUB 541.7bn, driven by positive contributions from telecom, fintech and media services. Revenue growth was constrained by lower sales of handsets and accessories due to import restrictions. MTS’s OIBDA declined by 2.3% year-on-year in 2022, mainly due to higher employee incentive expenses, recognition of non-recurring expenses and investments in new businesses, and an increase in the bank's provisions amid a volatile macroeconomic environment. In 2022, MTS’s adjusted net income attributable to Sistema decreased to RUB 16.5bn following a decline in OIBDA, as well as due to the impact of higher interest expenses, loss from discontinued operations and higher depreciation reflecting investments in the network and digital businesses. Financial performance in 2022 541.7 MTS’s revenue in 2022 RUB bn bn RUB RUB 66.3 total declared dividends for 2021 33.85 per ordinary share The Customer Lifetime Value 2.0 business strategy aims to create value by building a comprehensive ecosystem offering high-quality proprietary and partner digital products that meet the needs of the customer in different areas of life. The key tools here are deep personalisation, a seamless customer experience, long-term customer relationships and a focus on high-quality products. Customer Lifetime Value 2.0 The latest changes in the company's strategy are related to the prospect of spinning off its business segments as independent companies that will be valued by investors at their own multiples (higher than those of telcos). These companies will be able to raise investment independently and potentially have an IPO. The key areas of transformation: (1) completing the formation of the ecosystem core, which will also become the basis for (2) new “points of growth”; (3) spinning off business segments with their own value as “satellites”; (4) exiting non-core assets. The key achievements in the strategy implementation: MTS is one of the top 3 brands in terms of perception as an ecosystem 1 (along with Sber and Yandex) the number of ecosystem customers increased by 53%, to 13.5m ecosystem customers account for more than 43% of the company's revenues the number of MTS Premium subscribers increased by 71% in 2022 the key non-core segments (fintech, media and cashback) have gained scale and are demonstrating strong positive momentum 1 MTS’s internal study “Public image and loyalty: ecosystem brands”. 1 Adjusted OIBDA for FY 2022 does not include an impairment loss on non-current assets in the amount RUB 489 million The investment programme takes into account the following factors: ▪ continued development of the LTE network ▪ continued investments in digital products ▪ expenditures for the implementation of the “Yarovaya Law” ▪ fulfilment of the licensing requirements for the extension of rights to use LTE frequency bands ▪ potential introduction of commercial 5G solutions in the Russian market ▪ potential investment in the development of domestic 4G and 5G equipment The previous three-year dividend policy ended in 2021. The adoption of a new dividend policy has been postponed due to the high uncertainty of external conditions. At the annual general meeting in June 2022, MTS shareholders approved an annual dividend based on the company's financial results for 2021. The dividend amounted to RUB 33.85 per ordinary share, for a total of RUB 66.3bn, including payments on quasi-treasury shares. Dividend payments of RUB 48.2bn were completed by 16 August 2022. Dividend payments of RUB 0.36bn on ADRs converted after the dividend record date were made in January-February 2023. The holders of ADRs were entitled to receive dividends upon conversion of their depositary receipts into ordinary shares of MTS PJSC in accordance with the current Russian legislation, taking into account the legal and regulatory restrictions that exist and/or may appear in the future. 46 47 SISTEMA PJSFC Annual report 2022 sistema.com Results of key assets Sistema's effective stake 31.8 % ozon.ru Ozon is the operator of a leading multi-category online marketplace in Russia’s e-commerce market with a broad product mix and extensive logistical infrastructure enabling the company to provide the best services to its customers. online retailer in Russia by GMV¹ in Russia’s overall retail market growth of advertising revenue year-on-year 2 5 3 No TOP x growth in the number of orders GMV growth in 2022 year-on-year + 10 8 + 86 % % ~ of total warehouse space 1,4 m sq m > in high-margin advertising revenue 26 RUB > orders delivered in 2022 active customers sellers 465 35.2 23 0 m m thsd GMV (including services) in 2022 832 bn RUB Logistics Marketplace > 76 % of the company’s GMV > 35 m customers > thsd 23 0 sellers Fulfilment infrastructure ~ 1.4 m sq m of total warehouse space > % 3 0 growth of total warehouse space in 2022 year-on-year Ozon fresh A dark store concept with fast-moving products for fast delivery Private labels and deli production Financial services Payment and credit instruments (B2C): Payment and credit instruments (B2B): Advertising services RUB 26 bn in advertising revenue in 2022 Advertising revenue grew 3x in 2022 thanks to further improvements in advertising tools and growing scale of the marketplace Business model Increasing the number of pick-up points based on a franchise model and parcel lockers Ozon.Card debit cards Ozon Instalment for payment by instalments Flexible payment schedule enables sellers to finance their working capital and speeds up growth of turnover for both sellers and Ozon > bn 1 Gross merchandise volume. OZON 49 Results of key assets 48 SISTEMA PJSFC Annual report 2022 sistema.com Business development in 2022 The marketplace continued to grow strongly in 2022, with its share of total GMV reaching 78% in the fourth quarter of 2022, up from 68% in the fourth quarter of 2021. These results were due to the intensive growth in the number of buyers and sellers, increased assortment and loyalty, and a higher frequency of orders. The number of active buyers increased by 37%; the number of orders grew by 108% and reached 465m in 2022. An important step for the company was the development of Ozon Global. The company has significantly expanded the logistics infrastructure and delivery channels from China, Turkey and other countries, enabling its customers to receive goods from foreign sellers at pick-up points. Ozon Global is actively promoting the brand among foreign sellers through local offices in China and Turkey and continues to increase its appeal thanks to numerous efforts to internationalise Ozon’s product, including localisation of interfaces, the ability for sellers to set prices in a selected currency, and logistics solutions. The company is also expanding the use of fintech services for foreign sellers. Ozon continued to actively expand its fulfilment and logistics infrastructure in Russia in 2022. The total warehouse area grew by over 30% and reached approximately 1.4m sq m. The chain of branded pick-up points also significantly expanded, exceeding 24,500 at the end of 2022. Ozon’s fintech business continues its rapid development. In 2022, the company obtained a universal banking licence, which enabled it to expand its payment and credit instruments for buyers and sellers. Ozon Card continues to increase the number of customers and their loyalty. Ozon enables customers to pay for purchases in instalments, and also provides payment and credit instruments for sellers. The company also continues to develop its advertising platform. Due to the growing number of buyers and sellers, and the expansion of assortment, advertising revenue increased by almost 3x in 2022, to over RUB 26bn. Key e-commerce trends in Russia in 2022 In 2022, the Russian e-commerce market grew by 39% year- on-year, reaching a total size of RUB 5.7tn, with the overall retail market gaining 8%, up to RUB 42.5tn, according to INFOLine. The Russian e-commerce market will continue to grow rapidly, as e-commerce penetration potential remains significant. The e-commerce market growth in Russia was driven by a decline in shopping mall traffic, a reduction in product variety at offline shops as a result of suspension of operations by a number of international companies, changes in consumer behaviour in the form of a focus on searching and comparing offers on the Internet, and the effect of expanded online product offerings, primarily from the major multi-category marketplaces. The Russian e-commerce market has significant potential for rapid growth due to increasing demand in large cities – because of transition from shopping malls – and in smaller communities with limited offline retail presence – because of expanded logistics infrastructure (pick-up points, parcel lockers, fulfilment centres and sorting warehouses) and improved availability of fintech solutions. Rates of growth, % GMV 2019 2020 2021 2022 93 144 127 86 81 197 448 832 2019 2020 2021 2022 4.0 5.4 8.7 13.2 2019 2020 2021 2022 7.9 13.8 25.6 35.2 78 % share of total GMV in the fourth quarter of 2022 + 65 % CAGR (19–22) + 49 % CAGR (19–22) Operating performance Active customers, m Order frequency The Russian retail market’s total value may reach RUB 57.1tn by 2027. According to analysts’ estimates, the penetration of e-commerce may reach 32% by 2027, creating vast potential for the company’s growth. Multi-category retailers, such as Ozon, are the leading players in the Russian e-commerce market. Through a perfect combination of product mix, prices and services, multi- category players continue actively expanding their market share. The share of multi-category marketplaces grew from 34% in 2021 to 44%. Analysts expect their share to continue growing significantly in 2023. Developed e-commerce markets have been mostly consolidated by major players, while the Russian market remains fragmented. Consolidation trends create significant opportunities for major players in the fragmented Russian e-commerce market. 50 51 SISTEMA PJSFC Annual report 2022 sistema.com Results of key assets + 86 % increase in GMV in 2022 1 Ozon’s financial results are not consolidated within Sistema’s financial statements. Investments in Ozon are reflected in Sistema’s financial reporting using the equity method. The share of Ozon’s profit/loss attributable to Sistema is included in Sistema’s operating results. Investments are reflected at book value adjusted for attributable share of profit/ loss for the period and are not marked to market. 2 GMV incl. services is the value of goods sold on Ozon together with revenue from other services provided to buyers and sellers, inclusive of VAT minus discounts, cost of returns and cancelled orders. This figure does not include sales of Ozon.Travel. 3 Adjusted EBITDA is not an IFRS measure. Adjusted EBITDA is calculated as a pre-tax loss prior to the deduction of non-operating income (expenses), depreciation and amortisation, and share option expenses. Financial results, RUB m 2022 2021 Change, % GMV, including services 2 832.2 448.3 86 Revenue 277.1 178.2 55 Adjusted EBITDA 3 (3.2) (41.2) (92) Cash balance 90.5 108.0 (16) In 2022, GMV including services was more than RUB 832bn, 86% growth year-on-year. The main growth drivers were: ▪ Increase in the number of orders by 108% year-on- year, including due to growth in customer loyalty and engagement (Ozon delivered more than 170m orders in the fourth quarter of 2022); ▪ Increase in order frequency per customer by 52% year-on- year, to 13.2. In 2022, Ozon achieved positive adjusted EBITDA and maintained it over the last three quarters despite emerging challenges. Adjusted EBITDA increased to RUB 3.9bn in the fourth quarter of 2022, compared to adjusted EBITDA loss of RUB 15.9bn in the fourth quarter of 2021. Adjusted EBITDA as a percentage of GMV improved from (9.0%) in the fourth quarter of 2021 to 1.3% in the fourth quarter of 2022, driven by the company's focus on efficiency improvements throughout the reporting period. In 2022, adjusted EBITDA improved to RUB (3.2)bn from RUB (41.2)bn in 2021. The company was also able to maintain a strong financial position at the end of 2022, with year-end cash of RUB 90.5bn. Financial performance in 2022 1 The company’s key priorities for 2023 are to maintain high GMV growth rates and improve efficiency, further enhance customer loyalty by expanding the product range and increasing service level, attract sellers by enhancing existing tools and creating new ones, expand geographically, and develop adjacent verticals such as fintech. On 28 February 2022, the NASDAQ suspended trading in Ozon’s ADSs and has not resumed it since. The suspension of trading led to a delisting event in respect of the company’s bonds on 8 March 2022, as, under the terms of the Company’s senior unsecured convertible bonds due 2026, a delisting event occurs if, among other things, trading of the ADSs on the NASDAQ is suspended for a period of seven dealing days or more. The company and an ad hoc group of bondholders reached an agreement on the terms of the bond restructuring. In September 2022, Ozon entered into a debt financing agreement for up to RUB 60bn with ultimate maturity of four years from the signing date, which will help the company have a sufficient cash balance. In August 2022, a fire broke out at one of the units of Ozon’s fulfilment centre in the Istra district of the Moscow region. The fire spread to an area of 55,000 sq m and affected the second and third units of the warehouse complex. The company accelerated the commissioning of new fulfilment centres, increasing the total area of its fulfilment and logistics infrastructure by almost 400,000 sq m in 2022. On 15 March 2023, the NASDAQ notified Ozon that Ozon ADSs would be delisted from the exchange. On 21 March, Ozon filed an appeal against the NASDAQ’s decision on the compulsory delisting of the ADSs. Under the rules of the stock exchange, Ozon had the right to request a hearing by a special panel to appeal the exchange’s decision, and the company used this right. The hearing is required to be held within 45 days of the company’s request. The request suspends the delisting action pending the issuance of a written decision of the hearings panel. Strategic goals 52 53 SISTEMA PJSFC Annual report 2022 sistema.com Results of key assets Segezha Group is one of Russia's largest vertically integrated holding companies with a full cycle of logging and advanced wood processing. Segezha Group comprises forest, wood processing and pulp and paper assets. segezha-group.com production sites employees 21 thsd pcs export revenue 72 % geography of sales 8 0 countries > of operation in Russia 1 0 regions 18 Business model Segezha Group operates a vertically integrated business model based on its presence in all the key value segments – from in-house logging at leased forest plots to sale of high-margin products in the most attractive markets, both in Russia and abroad. The business model's vertical integration is meant to createadded value and ensure high business stability. As much as 94% of Segezha Group's demand for raw wood is met by its own harvesting. All this allows Segezha Group to hold leading positions in terms of production costs in all its business segments. 23.3 m cu m total allowable cut Sistema'seffective stake 62.2% Wood resources Enterprises Key products Other products Stubs Remain in the ground to preserve the root system CLT panels Prefab houses Sawmill and woodworking plant Sawn timber Laminated beams Pellets Chips Fibreboard Birch veneer logs Plywood mill Plywood Fibreboard Brickets Firewood, bark and technological resources Multi-fuel boiler Heat Pulp and paper mill Paper Wood chemical products Convertingfacilities Paper sacks (40-60%) Softwood sawlogs Pulp wood (30-40%) SEGEZHA GROUP 54 55 SISTEMA PJSFC Annual report 2022 sistema.com Results of key assets Industry overview for 2022 No 2 globally by output of paper for multiwall sacks 4 Segezha Pulp and Paper Mill is Russia's only manufacturer of micro-crepe high-strength unbleached sack paper. 77 %3 — share of Segezha Group in the Russian output of sack paper Global market Sack paper 71 % of sack paper is exported Global consumption of craft paper in 2020-2022 2 , m t Russian market The Russian sack paper market is export-oriented and its capacity is limited. In the reporting year, Russian manufacturers encountered problems with sale of its products to European countries and redirected supply to the domestic market and alternative markets - Asia, the Middle East, Africa, Latin America and even Turkey. Unbleached paper consumption in Russia was estimated at 120,000 t 5 in 2022, with Segezha Packaging accounting for 70,000 of it. 1 Estimate by Fastmarkets. 2 Estimate by Segezha Group. 3 Estimate by Fisher International. 4 Estimate by Fisher International. 5 Estimate by Segezha Group. In 2022, the pulp and paper and timber processing sectors encountered serious global challenges that resulted in reformatting of global trade. As the European Union banned imports of timber products, pellets, sack paper and plywood from Russia and the United Kingdom, Japan and the US introduced duties on these products, Russian exports were redirected to Asia, the Middle East and other regions. Q2 and the beginning of Q3 2022 saw an unprecedented increase in the cost of logistical services, caused mainly by international container sea shipping lines leaving Russia. Notably, transportation costs of deliveries to Latin America, India and some Southeast Asian and African countries grew more than threefold, significantly reducing the appeal of these markets. For some time, these challenges affected the availability of Russian products on the global market, but soon solutions were found. The situation on the transportation services market stabilised already in Q3-Q4 as new logistics operators emerged and alternative delivery routes were developed. In 2022, the sack paper market saw a slump in consumption. At the same time, there was a high deficit of supply at the beginning of the year, with prices in the European market soaring by over 40% compared to the end of 2021 1 . In H2 2022, the global demand for paper sacks and sack paper began returning to normal. The situation in the logistical services market also stabilised. 4.2 4.1 4.1 2022 2021 2020 56 57 SISTEMA PJSFC Annual report 2022 sistema.com Results of key assets Russian market In 2022, paper sack consumption in Russia was 946m 5 items , up 4% from the previous year. Demand for industrial packaging remained high throughout 2022, and the market was in need of import substitutes due to lower imports of paper sacks from other countries. According to estimates, imports fell by 10% 6 due to a drop in the segment of dry construction mixes. Paper sacks 1 Estimate by Fisher International. 2 Estimate by Fisher International. 3 Source: Segezha Group's internal survey. 4 Estimate by Segezha Group. 5 Estimate by Segezha Group (revised data). 6 Sources: FAOSTAT, estimate by Segezha Group. European market Demand for paper sacks decreased in the European market in 2022. The trend emerged in summer following a drop in construction activities. Demand from the cement industry and producers of dry construction mixes, which account for over 60% of paper sack consumption in Europe, remained relatively low till the end of the year. Consumption of paper sacks in Russia in 2020-2022 4 , m items 1 Source: Timber-online. 2 Sources: FAOSTAT, estimate by Segezha Group. 3 Sources: FAOSTAT, estimate by Segezha Group, industry mass media. 4 Sources: materials of the industry conference CGTC 2022, FAOSTAT, estimate by Segezha Group. 5 Sources: FAOSTAT, production decline rates in 2022 (according to Rosstat), estimate by Segezha Group. 6 Sources: Rosstat, WhatWood (Russian Timber Journal, 12-2022). 7 Sources: FAOSTAT, estimate by Segezha Group. Sawn timber 9 in Europe by output of softwood sawn timber 1 1 in Russia by output of paper sacks 1 Global market The global market of softwood sawn timber was estimated at 325m cu m in 2022 3 . The United States and China remained the biggest consumers of sawn timber, used mostly in the construction sector and furniture production. Global sawn timber consumption is estimated to have dropped by 7% in 2022 year-on-year 4 . Russian market Russia's output of softwood sawn timber in 2022 is estimated at 36m cu m 5 , a decrease of 10% 6 from 2021. Russia is the world's No 5 producer of softwood sawn timber after Europe, the US, China and Canada with a market share of 11% 7 . In 2022, Russia exported more than 60% 8 of its sawn timber output. Exports of softwood sawn timber fell by 22% in 2022, to 23m cu m 9 (60% of the output), due to the ban on its sale to the EU and a decline in construction activities in China. Due to the transformation of global supply chains and Russian producers' turn eastwards 10 , China's share in Russian sawn timber exports grew by 8 p.p. to 61%. The second biggest buyer of sawn timber was the CIS with 18%. The share of MENA 11 countries grew by 2 p.p. to 8% 12 . Consumption of sawn timber in Russia in 2020-2022 13 , m cu m 8 Sources: WhatWood (Russian Timber Journal, 01-2023). 9 Sources: FAOSTAT, estimate by Segezha Group. 10 Sources: Sawn Timber Market in Russia, No 22, WhatWood. 11 MENA - Middle East and North Africa. 12 Source: WhatWood (Sawn Softwood Market in Russia, 01-2023). 13 Sources: estimate by Segezha Group on the basis of industry estimates by WhatWood, Woodstat, FAOSTAT, Timber-online. No No No % % % 97 of Segezha Group's sawn timber is exported 65 is Segezha Group's share in the Russian paper sack market 3 11 is Russia's share in the global softwood sawn timber market 2 2 globally by output of paper for multiwall sacks 2 910 800 946 2022 2021 2020 12.1 9.1 13 2022 2021 2020 58 59 SISTEMA PJSFC Annual report 2022 sistema.com Results of key assets 1 Source: Segezha Group's internal survey, WhatWood, incl. Galich plywood mill, not consolidated by Segezha Group as a subsidiary of Segezha Group in accordance with the terms and conditions of the loan agreement. 2 Sources: Vision Hunters, WhatWood, Segezha Group's internal survey. 3 Source: WhatWood. 4 Source: Segezha Group's internal survey, WhatWood. 5 Sources: WhatWood, Segezha Group's financial statements. 6 Source: WhatWood. Plywood No 3 globally by birch plywood production capacity 1 52 countries — geography of sales of Segezha Group's birch plywood Global market In 2022, the birch plywood market witnessed serious structural changes as the access of Russian producers to their traditional European market was restricted. Moreover, import duties on Russian plywood introduced by the United States and Canada and a sharp increase in transportation costs in this direction resulted in a drop in supply to North America, which had been the second biggest importer of Russian plywood in 2021. On alternative markets, supply exceeded demand in H2 2022, which brought the prices of birch plywood down. Global consumption of plywood in 2020-2022 2 , m cu m Russian market In 2022, Russian producers of birch plywood were faced with restrictions on supply to Europe, growing costs of logistical services, departure of their Western partners from Russia and strengthening of the Russian rouble. Plywood output in Russia fell by 24% 4 in 2022 vs 2021, to 3.2m cu m. Nevertheless, Russia remained an undisputed global leader in birch plywood production, accounting for 73% 4 of the global output. Segezha Group accounted for 5.1% 5 of Russia's output. Consumption of plywood in Russia in 2020-2022 6 , m cu m 1 Source: Timber-online, Segezha Group's internal survey. 2 Sources: Rosstat. 3 Sources: WhatWood, Segezha Group's financial statements. 4 Source: Segezha Group's internal survey. 5 Source: Segezha Group's internal survey. 6 Source: Segezha Group's internal survey. 7 Sources Timber-online, Segezha Group's internal survey. 8 Sources Timber-online, Segezha Group's internal survey. 9 Source: estimate by Segezha Group. 10 Source: Timber-online. 11 Source: Timber-online. Prefabricated houses In 2022, the Russian market of prefabricated houses using laminated beams was estimated at 146,000 cu m 1 , down 7% year-on-year. The share of housing built using timber has more than doubled in the last 15 years and is estimated at 20.3m sq m 2 . European countries and Japan remain the biggest consumers of laminated beams. The biggest producers of laminated beams are Austria 7 (1.6m cu m in 2022) and Germany 8 (1.4m cu m in 2022). The European output of laminated beams in 2022 was estimated at 3.8m cu m 9 , an increase of 2% vs. 2021. The growth was brought about by the commissioning of new production capacity in Germany. 12 % — Segezha Group's share in the Russian prefab houses market 3 Laminated wood structures CLT panels The European market of CLT panels continued growing in 2022, driven by consumers' demand for eco-friendly and safe housing, including multi-storey buildings. Europe's CLT panels output in 2022 is estimated at 1.3m cu m 10 (+17% year-on-year), the current production capacity being 2.0m cu m. The increase in the CLT output came from the commissioning of new production facilities in 2020- 2021, which increased their capacity utilisation in 2022. The CLT panels output is projected to reach 1.8m cu m 11 in the next two years, with new production capacity slated for commissioning in 2023. No No No 95% of laminated beams produced by Segezha Group is exported About 1 1 1 in Russia by prefab houses production capacity 4 in Russia by output of laminated beams and prefab glulam houses 5 in Russia by CLT panels output 6 1.5 1.1 1.2 2022 2021 2020 4.8 4.6 4.2 2022 2021 2020 60 61 SISTEMA PJSFC Annual report 2022 sistema.com Results of key assets 1 Source: Fisher International. 2 Taking into account paper used at own conversion facilities. Business development in 2022 No 1 in Russia by output of paper and paper sacks 1 Paper sale price, EUR/t (FCA) Paper output and sales fell in 2022 amid the complicated geopolitical situation and structural transformation of the markets. In response to external challenges, Segezha Group increased the share of paper sold in Russia and, given the increased competition in the domestic market of sack paper and imitation parchment, developed and launched new products, cable paper, paper for corrugation and treatment with phenolic resins (for plywood production), colour and greaseproof imitation parchment. Paper production facilities, thsd t Location Paper production capacity Two enterprises Two regions 413 Segezha PPM Republic of Karelia 388 Sokol PPM Vologda region 25 Paper output, thsd t Paper sales 2 , thsd t Segezha Group's revenue from paper sales by country, % 14 11 7 6 32 29 Russia China Turkey South Africa Egypt Other The bulk of Segezha Group's sack paper output for 2022 was exported to over 60 countries. The company entered some new markets, notably, South Africa, Saudi Arabia, South Korea, Uzbekistan, etc. It also strengthened its presence in China, engaging new traders and finding new buyers. As a result, China accounted for 14% of Segezha Group's paper revenue. The share of paper supplied to the domestic market grew significantly in the reporting year and reached 29%. Paper and Packaging Paper Paper is an important product in Segezha Group's portfolio. The company produces the entire range of brown sack paper with unique strength characteristics, semi-compliant and micro-crepe white paper and imitation parchment made of unbleached sulphate pulp. 2 globally by output of paper sacks 2 globally by output of paper for multiwall sacks 413 paper production capacity 336 paper output in 2022 No No thsd t thsd t Development plans for 2023 Continue expansion of the geography of sales, finding new customers and alternative logistical routes Complete the final stage of the long-term environmental programme for the overhaul of recovery boilers and the replacement of electrostatic precipitators at Segezha Pulp and Paper Mill. Replace the industrial waste water collector, construct a landfill for waste of hazard class IV-V at Segezha PPM. Start the biological treatment project at Segezha PPM, which includes repairs of drain boxes, filter press, compressors and transformers and construction of a sludge pond dam. Start the upgrade of the chemical water treatment and water preparation systems at Segezha PPM. Complete the construction of the new state-of-the-art finished products warehouse at Segezha PPM. 370 408 319 2022 2021 2020 369 402 336 2022 2021 2020 677 531 834 2022 2021 2020 62 63 SISTEMA PJSFC Annual report 2022 sistema.com Results of key assets 1 Estimate by Fisher International, estimate by Segezha Group. 2 Segezha Group sold its sack and packaging production facilities in Europe on 22 March 2023. Paper packaging Segezha Group develops and produces a wide range of packaging solutions for different uses. Packaging is used for dry construction mixes, cement, chemical products, fertilisers, pet products, charcoal and food products. Packaging solutions are also needed for retail, e-commerce and deliveries. Sack and packaging production facilities, m items Location Paper packaging production capacity Segezha Group in Russia Three towns Three regions 878 Segezha Republic of Karelia Salsk Rostov region Lobnya Moscow region Segezha Group 2 in Europe Seven towns Seven countries 704 Horn Netherlands Aalborg Denmark Ahern Germany Varese Italy Uvalno Czech Republic Izmir Turkey Ploiesti Romania In its consumer packaging, Segezha Group strives to meet its customers' highest requirements to colour and quality of printing. In 2022, Segezha Packaging invested in upgrade of its auxiliary equipment, notably, it commissioned a new eight-colour printing machine in Lobnya, the Moscow region, in January. Paper sack output, m items Paper sack sales, m items 1 Source: Segezha Group's internal survey. Segezha Group's paper sack sales by country, % Paper sack sale price, EUR/thsd items (FCA) No 1 in Russia by paper sack output 1 2 globally by output of paper for multiwall sacks No bn items bn items 1.4 Paper packaging output in 2022 1.6 Paper packaging production capacity Development plans for 2023 Given the current geopolitical tensions, the company is updating its development strategy with a focus on expansion of the geography of sales. In 2023, it plans to standardise its paper sacks, which will increase the production capacity and help to meet a higher consumer demand. Segezha Group will continue enhancing safety of its equipment prioritising occupational health and safety to ensure the stability of enterprises' infrastructure. 10 5 5 5 35 41 Russia Germany Turkey Romania Netherlands Other Restrictions on imports of the necessary raw materials (white paper, glue, paint, film) made Segezha Group start using the internal resources of Segezha PPM and search for Russian suppliers of raw materials. Notably, the company organised tests of Russian-made raw materials at its R&D centre in Segezha, the Republic of Karelia, which helped it to find alternatives with minimum money and time input. Segezha Group's share of the Russian paper sack market was 73% 1 in 2022. The company continued working to increase the share of high-margin products, to optimise the structure of its product portfolio and standardise it with a view to increasing the productivity and the output in order to meet a higher consumer demand. 1,428 1,291 1,405 2022 2021 2020 1,446 1,302 1,406 2022 2021 2020 175 176 245 2022 2021 2020 64 65 SISTEMA PJSFC Annual report 2022 sistema.com Results of key assets Segezha Group produces high-quality dried cut softwood timber at its high- tech plants in Siberia and Northwest Russia. Forestry Management and Woodworking Despite economic volatility, Segezha Group's sawmills continued developing. The key results of the reporting year were: ▪ Improvement of wood processing technologies, automation of production ▪ Enhancement of the quality of products and their competitiveness on export markets ▪ Rational and comprehensive use of raw materials, organisation of zero-waste production ▪ Improvement of in-plant logistics In 2022, some equipment was replaced at the Onega Woodworking Plant, including the front loader, and construction of side railway tracks was started. The company also expects to acquire more new equipment. Karelian Wood Company established an in-house repair shop as part of the imports substitution programme. It also launched new types of products, opening a planed products shop. In 2022, Segezha Group integrated the sawmills of LLC Inter Forest Rus, which were acquired in 2021, in its asset management system. The enterprises prepared production data and management accounts in accordance with the Group's standards, started using the centralised procurement programmes, etc. 1 The gross sawn timber capacity includes all sawn timber capacity of the Group as of 31 December 2022, including sawn timber used further to produce laminated beams, CLT panels, etc. Sawn timber sales, thsd cu m As the global commodities markets transformed and sales of sawn timber to China increased, Segezha Group's sawn timber output and sales doubled in 2022 vs. 2021. The decrease in sale prices of Segezha Group's sawn timber was due to the changes in the market situation and geography of sales. Segezha Group's revenue from sawn timber sales by country, % China and Egypt had always been key buyers of the Group's sawn timber and remained such in 2022. China's share grew significantly in 2022, by 32 p.p. to 73%. In addition, Segezha Group redirected its shipments from Europe to other Asian countries and MENA. When dispatching and shipping sawn timber in 2022, Segezha Group encountered overload of eastern ports and eastbound railways. Because of that, the company developed and introduced alternative routes and schemes: ▪ Distribution of shipments between land-based routes via land-based border checkpoints to China and via Far Eastern ports by sea freight ▪ Export by ships from Onega, Arkhangelsk and St Petersburg to Egypt ▪ Redirection of cargo flows via Georgia, Mongolia, Kazakhstan and China 8 high-tech plants in Siberia and Northwest Russia 2,954 gross sawn timber production capacity thsd cu m Development plans for 2023 Continue upgrade of Lesosibirsk WP No 1 aimed at increasing the output of finished products, the useful output after sawing, automation and energy efficiency and the output of pellets. Carry out measures to substitute imported parts, units and modules of production equipment. Upgrade production line management and measurement systems. The main goal is to increase the accuracy of obtained data, minimise the human factor, reduce production and operating expenses and increase the output and economic efficiency of production facilities. 10 4 3 10 73 China Egypt Lebanon Russia Other Sawn timber output, thsd cu m 1,170 1,192 2,239 2022 2021 2020 Sawn timber sale prices, EUR/cu m (FCA) 239 138 204 2022 2021 2020 1,056 1,217 2,263 2022 2021 2020 Sawn timber production facilities, thsd cu m Location Gross sawn timber production capacity Eight enterprises Five regions 2,954 1 Lesosibirsk Woodworking Plant No 1 Krasnoyarsk region 650 Tairiku-Igirma Group Irkutsk region 619 Timber Trans Irkutsk region 412 Priangarsk LPK Krasnoyarsk region 410 Novoyeniseisky Timber and Chemical Plant Krasnoyarsk region 350 Sokol Woodworking Plant Vologda region 251 Onega Woodworking Plant Arkhangelsk region 150 Karelian Wood Company Republic of Karelia 112 66 67 SISTEMA PJSFC Annual report 2022 sistema.com Results of key assets 1 Data of WhatWood, including the capacity of Galich Plywood Mill. 2 Galich Plywood Mill was put into operation on 14 December 2022. The results of Galich Plywood Mill are not consolidated with the Group's results in accordance with the loan agreement between JSC Alfa Bank and LLC Galich Plywood Mill dated 20 March 2020. Segezha Group's enterprises produce birch, softwood and composite plywood. Plywood production and sales fell in 2022 amid the structural transformation of markets. Plywood and Boards Plywood production sites, thsd cu m Location Plywood production capacity Three enterprises Three regions 227 Vyatka Plywood Mill Kirov region 192 Krasfan Krasnoyarsk region 35 Galich Plywood Mill 2 Kostroma region 125 Segezha Group's revenue from plywood sales by country, % Due to the complicated geopolitical situation in 2022, the company increased sales to the domestic market and to new priority markets - China, Egypt, Israel, Turkey, India, etc. In line with the new customers' demand, it increased supply of standard laminated plywood with brown coating. In 2022, the company began supplying plywood for building LNG tankers and LNG storage terminals. It signed a long- term contract for supply of plywood for LNG tankers to China. Also, in the reporting year, the company successfully launched sales of the Segezha Ecofloor engineered wood boards, thus entering a new segment of flooring. In response to the logistical challenges of 2022, the Group developed container routes via Novorossiisk and Far Eastern ports, railway shipments to China and multimodal shipments to Latin and South America via Iran and India with transshipment in Turkey, China and South Korea. thsd cu m thsd cu m 35 softwood plywood production capacity 192 birch plywood production capacity No 3 globally by birch plywood production capacity 1 Development plans for 2023 Expand the geography of sales and customer base. Further expand the product portfolio: launch the production of UF plywood, plywood covered with UV varnish and plywood for vibration and sound insulation at Vyatka Plywood Mill; continue production of 7x13 ft plywood at Galich Plywood Mill. Continue the project to expand the production capacity of Vyatka Plywood Mill. Develop sales in the industrial segment: produce and supply plywood for the car- making, shipbuilding and machine-building sectors. Expand sales of tanker plywood for customers in Russia, China and South Korea. Set up a buffer warehouse in Turkey to ensure quick deliveries to neighbouring regions. Open a sales office in China. 14 6 6 5 33 35 Russia Germany Israel South Korea Netherlands Other Plywood sales, thsd cu m 178 186 157 2022 2021 2020 Plywood sale prices, EUR/cu m (FCA) 678 405 642 2022 2021 2020 Plywood output, thsd cu m 196 192 162 2022 2021 2020 68 69 SISTEMA PJSFC Annual report 2022 sistema.com Results of key assets Japan 17 Germany 17 Russia 5 Other 13 Italy 42 Israel 5 1 According to Segezha Group's internal research as of 31 December 2022. Laminated wood products Wood structures production facilities, thsd cu m Location Laminated wood products production capacity Two enterprises One region 150 Sokol Woodworking Plant Vologda region Glulam and prefab houses 100 Sokol CLT Vologda region CLT panels 50 Glulam In the glulam segment, Segezha produces softwood laminated beams that have high strength and resilience to environmental impacts. Because of that, laminated beams are used to construct not only wooden houses, but also other types of buildings and structures in combination with other materials. Glulam sale prices, EUR/cu m (FCA) In 2022, the company managed to redirect laminated beams to the markets of Turkey, Israel and India and to increase sales on the domestic market. Glulam output, thsd cu m Glulam sales, thsd cu m Prefab houses sale prices, EUR/cu m (FCA) Prefab houses output, thsd cu m Prefab houses sales, thsd cu m In 2022, the output and sales of prefabricated houses fell by 13% and 8%, respectively, due to a lower demand in the housing construction market amid a decline in purchasing power and high uncertainty. Despite economic volatility, the company managed to expand the geography of sales and began deliveries to the Primorye and Irkutsk regions, Armenia and Kazakhstan. Segezha Group's prefab houses are sold mostly on the domestic market. In order to reach out to all potential target audience groups the company developed new products and entered new market segments in 2022. Also last year, it began supplying prefab houses to a new segment - construction of tourist facilities (hotels, duplexes, cottages, holiday camps). This became possible thanks to government support of the tourist industry. + 51 Growth of CLT panels output in 2021 (year-on-year) % No 1 in Russia by prefab glulam houses production capacity 1 Segezha Group's revenue from glulam sales by country, % Prefabricated houses Segezha Group produces prefabricated houses of laminated beams at Sokol Woodworking Plant. 19 19 18 2022 2021 2020 20 19 17 2022 2021 2020 421 327 670 2022 2021 2020 490 318 475 2022 2021 2020 65 38 27 2022 2021 2020 63 38 35 2022 2021 2020 70 71 SISTEMA PJSFC Annual report 2022 sistema.com Results of key assets Increase the sack paper and greaseproof paper output at Sokol PPM CLT panels sale prices, EUR/cu m (FCA) In 2022, the output of CLT panels grew by 51%, while sales soared by 94%, partly due to Segezha Group's project of construction of multi-storey buildings. The bulk of sales on the Russian market was in the segment of individual housing construction. Continue redirection of sales to the Russian and CIS markets and enter new export markets, including India, Iran and Turkey. The company is also considering such markets as China, Brazil, Algeria, Egypt and Persian Gulf countries. Continue construction of multi-storey CLT buildings. Roll out the experience of building using CLT panels to other segments of the construction market. Continue the distribution programme for laminated beams and CLT panels. Develop architectural and engineering solutions for construction of agricultural and industrial buildings impacted by corrosive media. Take part in the construction of housing using prefab CLT houses, increase sales of CLT in the segment of individual housing construction. Continue developing methodological recommendations for designing buildings of CLT panels, making changes to construction and sanitary rules and regulations. Start a long-term project of standardisation of glulam structures in Russia (together with the Russian Association of Wooden Housing Construction), study characteristics of glulam and CLT to make adjustments to construction and sanitary rules and regulations. Roll out the lean production project at Sokol WP to all shops and involve about 80% of personnel in the project. CLT panels CLT panels output and sales, thsd cu m Operating and investment development strategy Strategic priorities Development plans Development plans for 2023 CLT panels are modern prefabricated panels made of cross laminated timber. They are used for construction of individual houses and high-rise buildings and are popular among architects. 2021 2022 447 531 2021 2022 Production Sales 2021 2022 9 7 14 11 Expansion of the wood resources base Manufacturing assets Construct haulage roads Upgrade Segezha PPM to increase capacity and reduce production costs Increase the share of own wood resources by expansion of the allowable cut and increase its utilisation rate Introduce the intensive forest management model in all logging regions, consistently expand the allowable cut Modernise Onega Woodworking Plant with expansion of the annual production capacity by 48,000 cu m of sawn timber and by 30,000 t of pellets Implement investment programmes for replacement of harvesters and logging trucks Modernise Lesosibirsk Woodworking Plant with expansion of the annual production capacity by 50,000 cu m of sawn timber and by 100,000 t of pellets Expand the annual production capacity at Vyatka Plywood Mill by 64,000 cu m of plywood Given the turbulence on the market, the company worked hard to quickly adapt the product segment to the new reality and secure its leading position in the industry. Notably, it redirected sales to the Russian domestic market and also focused on developing markets in the CIS. Ready-to-assemble prefab CLT houses dominated sales on the Russian market. Most sales were made in the Moscow and Leningrad regions. In 2022, the company began supplying CLT panels to India. 72 73 SISTEMA PJSFC Annual report 2022 sistema.com Results of key assets Financial performance in 2022 Financial results, RUB m 2022 2021 Change, % Revenue 106,766 92,442 15.5 Adjusted OIBDA 1 24,650 31,234 (21.1) Operating income 10,111 22,351 (54.8) Net income attributable to Sistema 3,758 12,041 (68.8) In 2022, revenue increased by 15.5% year-on-year to RUB 106.8bn due to increased sales of sawn timber and growing prices of some types of products. The company's performance in H2 2022 was under pressure due to the significant strengthening of the rouble and a decrease in sale volumes and prices of certain products. In 2023, Segezha Group continued work to expand its presence in alternative sales markets. Adjusted OIBDA 2022 fell due to the stronger rouble, ongoing structural transformation of the sales geography, downward correction of prices from the record-high levels of 2021 and growing logistical costs of foreign components. OIBDA cleared of the currency factor was positive. The company's net debt grew by 64.5% year-on-year due to implementation of the investment programme in the reporting year, payments under M&A deals and payout of dividends for 2021. In 2022, net profit attributable to Sistema totalled RUB 3.8bn compared to RUB 12.0bn in 2021, due to the change in OIBDA and higher interest expenses. RUB 106.8 bn In 2022, revenue increased by 15.5% year-on-year RUB 3.8 bn Net profit attributable to Sistema Strategic priorities Strategic priorities Sustainable development Innovation Modernise and replace treatment equipment at Segezha PPM Upscale and develop the Group's existing IT projects, including SAP solutions on the basis of the in-house centre of excellence, the automated dispatch system SegezhaLes, etc. Reduce the environmental impact and use state-of-the- art production technologies Increase the number of automated data sources and upscale the system for production data storage and processing Implement the policy of sustainable forest management on the basis of the forest seed centre in the Kostroma region Set up and develop R&D centres to create innovative solutions for the company's product portfolio Reduce number of industrial injuries Develop AR products and robotisation (RPA) Implement umbrella charity projects "City Infrastructure", "Sports", "Education" and "Environment" Design the company's industrial facilities using scientific competences of CJSC Giprobum 1 Adjusted for accruals in 2021 related to the LTI programme. 74 75 SISTEMA PJSFC Annual report 2022 sistema.com Results of key assets Sistema's effective stake federal developers developers in terms of new housing delivery most reliable developers 3 5 1 0 TOP TOP TOP of NSA delivered in 2022 across 19 projects, up 74% year-on-year of new NSA launched in 2022, up 2.3x year-on-year of new contract sales in 2022 1 735 652 423 thsd sq m thsd sq m thsd sq m of NSA2 of cash collections³ in 2022 in market value of assets4 6.4 75 288 RUB bn RUB bn m sq m in design and construction phases на стадии строительства 38 projects Etalon Group is one of the largest and oldest residential property developers in the Russian market. The company is one of the leading players in the markets of St Petersburg and Moscow, and is also actively expanding in five other Russian regions. etalongroup.com Business model ERZ ERZ Forbes present in six or more Russian regions in the mass housing category 1 Including accumulated new contract sales at YIT Russia as of the date of its acquisition. 2 Net sellable area. 3 Including accumulated cash from development operations of YIT Russia as of the date of Etalon Group's acquisition of YIT Russia. 4 As of 31 December 2022, according to Nikoliers. The integrated business model allows the company to efficiently manage costs and create added value at every stage of development. With industry consolidation by major players and emerging market opportunities, the company is focusing on digitalisation of the entire value chain to further improve its business efficiency and competitiveness. Management Procurement Management of land assets Design Construction Sales Services U n i fi e d m a n a g e m e n t ETALON GROUP 76 77 SISTEMA PJSFC Annual report 2022 sistema.com Results of key assets Total deliveries of apartment buildings, m sq m Market share of the top 20 players 1 The target used here is 33.3 sq m per capita, as specified in the Russian Housing Development Strategy Through 2025. 2 Source: The Central Bank of the Russian Federation. Industry overview for 2022 Per capita housing area, sq m Moscow St Petersburg Warsaw London Stockholm Rome Berlin 22 28 34 33 34 39 40 2025 target 1 Sources: Rosstat, national statistics agencies, Berlin-Brandenburg, Centre for Cities, ISTAT, SOW 2018 2019 2020 2021 2022 2023 – 2026 17.6 18.6 18.2 19.4 20.1 49.5 37 43 43 47 44 49 Source: Etalon Group’s analysis based on data from DOM.RF and ERZ.RF Although in March 2022 the highest average interest rate on retail deposits reached 14.2%, it followed the key rate cuts and by the end of the year returned to the level of early 2022. This is why retail bank deposits grew by only 6% (RUB 1.9tn) in 2022, which is close to the growth rate of deposits in 2021 2 . At a time when real returns on deposits are negative and inflation is high, Russians prefer to invest in real estate, which is reflected in the growth of funds deposited in escrow accounts of off-plan home buyers (+35%). Deliveries: million-plus cities (other than Moscow and St Petersburg), m sq m 2016 2017 2018 2019 2020 2021 2022 22.0 20.6 20.5 22.6 22.1 24.6 26.3 2016 2017 2018 2019 2020 2021 2022 4.0 3.4 3.5 3.5 3.5 3.1 3.5 2016 2017 2018 2019 2020 2021 2022 3.4 3.4 3.5 5.2 5.0 7.8 6.8 Need for improvement of housing conditions In terms of the provision of housing area, both in large cities and in Russia, a positive trend towards an increase in per capita housing area, while according to the Strategy for the Development of the Construction Industry and Housing and Communal Services of the Russian Federation for the period up to 2030, the level of per capita housing area should be at least 33.3 sq. m. For the real estate market, 2022 was a challenging year. As the key interest rate doubled in February, resulting in higher mortgage rates, consumer confidence declined, prices for building materials and equipment rose, and there was a temporary disruption in supply chains, many real estate players were forced to revise their plans for deliveries and launches. At the same time, restrictions on land availability in key regions intensified competition. Despite the slowdown in demand, the positions of the top 20 players continued to strengthen thanks to their sound financial health and the subsidised mortgage programmes which, according to Frank Media estimates, accounted for 39% of total loans, rising by 11 p.p. over the year. In addition, expansion of major developers into million- plus cities, where residents need to improve housing conditions and are increasingly interested in a quality product from reliable federal developers, has also contributed to the increased volume of deliveries the growth of funds deposited in escrow accounts of off-plan home buyers + 35 % Deliveries: Moscow, m sq m Source: DOM.RF Deliveries: St Petersburg m sq m 1 According to DOM.RF. Deliveries of new housing in Russia totalled 103m sq m in 2022 1 (+11% year-on-year). Potential further growth in annual housing deliveries is driven by the goals of the national project Housing and Urban Environment, which envisages deliveries of 120m sq m per year, which can be achieved with comfortable conditions for construction and economic situation in general. Furthermore, the weighted average mortgage rate in the primary market in 2022 reached a minimum level of 3.5%. According to the forecast of the Central Bank of the Russian Federation, in 2023, the mortgage issuance rate is expected to increase to 12-16%. Data on deliveries of apartment buildings in Etalon Group’s key regions: Moscow, Moscow region, St Petersburg, Republic of Tatarstan, Omsk region, Tyumen region, Yekaterinburg region, Novosibirsk region (data from DOM.RF). Expectations for 2023-2026 are based on data from ERZ.RF. The trend towards industry consolidation continues, and by 2026 the share of the top 20 developers in the structure of apartment buildings supply will increase to a record 49% in the key regions where Etalon Group operates, while the number of small and medium players will continue to decline. Moscow and St Petersburg remain the key Russian regions for property development, but given the limited land assets, the top 20 federal players are entering new regions, mostly million-plus cities. New housing deliveries in Russia’s biggest urban agglomerations exceeded 26m sq m in 2022. 78 79 SISTEMA PJSFC Annual report 2022 sistema.com Results of key assets Business development in 2022 Project portfolio growth and regional expansion In May 2022, Etalon Group closed the acquisition of YIT Corporation’s Russian business, adding 19 projects in design and construction phases in five Russian regions: Moscow and the Moscow region, St Petersburg, the Yekaterinburg region, Kazan, and Tyumen. The portfolio’s NSA is over 0.6m sq m. Etalon Group now has a presence in eight regions, 38 projects in design and construction phases, and the total NSA of 6.4m sq m. Improving the product while making it more affordable With market volatility in 2022, the company focused on improving the product in order to maintain efficiency and quality. This is why most of the projects were launched at the end of the second quarter of 2022 and ensured a recovery in sales by the end of the year. Betting on innovation Etalon Group is consistently pursuing a technological transformation aimed at improving operational efficiency and business profitability. The key R&D areas include development of a seamless digital architecture across the entire value chain, product standardisation, introduction of new industrial house- building technologies, and enhancement of digital service platforms. Today Etalon Group: ▪ Develops robotic design to reduce documentation preparation and construction cycle times ▪ Automates the process of creating and approving specifications ▪ Develops CONTRUST, a system integrating existing IT products for construction control into a single cloud platform ▪ Develops the use of prefabricated elements in construction ▪ Continues to develop modular building technologies ▪ Works on the Digital District project in partnership with MTS ▪ Automates procurement through the creation of a single digital platform ▪ Develops model standardisation solutions ▪ Develops proprietary platforms for customer communications, sales and additional services Increased focus on sustainability (ESG) Etalon Group continues to focus on the sustainability agenda. The company not only builds residential properties, but also creates a comfortable environment, participating in the socio- economic development of its regions of operations and improving the quality of life. In 2022, Etalon Group opened three pre-school facilities and one school for 1,095 students. The company participated in and became a partner of more than 20 events for local communities and helped more than 40 charity programmes. An important pilot project in 2022 was the certification of the Rauta residential complex in Yekaterinburg in accordance with the new green government standard (GOST R). The voluntary green housing certification system is scheduled to be launched in 2023, but the first certificates will be received by the pilot projects that have completed the assessment, including Etalon Group’s project. Etalon Group’s development in 2022 was focused on geographic expansion. The company entered five new regions and added about 20 projects to its portfolio, delivering 735,000 sq m and strengthening its position among the top 5 developers in Russia. In addition to active portfolio expansion, Etalon Group is working to improve the affordability of its projects, which, combined with new launches, will ensure sustainable business growth and achievement of strategic goals by 2024. Development strategy Etalon Group’s strategic goal for 2022-2024 is to become the leading federal player by volumes of construction in progress and land holdings with the highest business efficiency among Russian developers. This goal will be achieved by adapting the company to a changing environment and creating conditions for the company’s sustainable development as an innovative construction and development business. Acquisition of new projects and further regional expansion will contribute to the implementation of plans to increase the scale of the business. Given the new challenges in the industry, business efficiency growth will be achieved through the development of affordable product and standardisation, as well as the development of digital solutions to speed up construction times and reduce costs. Continued regional expansion. Strategy implementation Improving efficiency through product and process management Intensive development of new technologies Business scale growth Improving business processes and implementing product standards to optimise costs and develop an affordable product in the regions and on the outskirts of Moscow and St Petersburg. Development of digital procurement tools and sustainable partnerships with suppliers. Development of IT departments and further digitalisation of the business. Development of industrial technologies and new product offerings in the real estate market. Maintaining at least 6m sq m of NSA over the strategic horizon through organic and inorganic growth. 80 81 SISTEMA PJSFC Annual report 2022 sistema.com Results of key assets Gross profit rose from RUB 27.8bn to RUB 28.2bn thanks to efforts to improve operational efficiency. Pre-PPA gross profit margin increased from 36% in 2021 to 38% in 2022, exceeding the target level of 35%. Pre-PPA EBITDA was RUB 18.8bn compared to RUB 21.1bn a year earlier, due to one-off payments related to the acquisition of YIT’s Russian business. Nevertheless, pre- PPA EBITDA margin remained almost unchanged at 23% (-0.9 p.p. year-on-year). Due to the deal with YIT on favourable terms, Etalon Group achieved a record net income of RUB 13.0bn, up 4.3x year-on-year. The ratio of net corporate debt to pre-PPA EBITDA was less than 1x, well below the target level of 2x-3x. Comfortable leverage and additional liquidity from released escrow accounts allow Etalon Group to deliver on its strategic objectives, including development of new technologies, acquisition of new projects and implementation of projects from the current portfolio. 1 As of February 2023, unless specified otherwise. 2 As of 31 December 2022, according to Nikoliers. 3 Purchase price allocation. 4 Without regard to rounding. 1 Without regard to rounding. 2 Including accumulated new contract sales at YIT Russia projects under construction. 3 Including cash receipts from the perfomance of YIT Russia. Financial performance in 2022 2022 2021 Change 4 ,% Revenue 80,556 87,138 (7.6) Pre-PPA EBITDA 18,795 21,139 (11.1) EBITDA 16,484 17,880 (7.8) Net income 13,001 3,007 332.4 Net corporate debt 14,515 2,581 462.4 Net corporate debt / pre-PPA EBITDA 0.77 × 0.12× Despite declining consumer confidence, the company’s 2022 revenue was RUB 80.6bn, just 7.6% down year-on-year. One of the supporting factors was record delivery, which facilitated the release of escrow accounts and the recognition of revenue from completed projects. Financial results, RUB m 2022 2021 Change 1 ,% Sales², RUB m 71,830 84,388 (14.9) Sales², thsd sq m 423 446 (5.1) Average price, RUB thsd per sq m 201 189 6.1 Average price (residential), RUB thsd per sq m 262 239 9.7 Cash receipts 3 , RUB m 74,986 84,094 (10.8) Deliveries, thsd sq m 735 421 74.4 Sales launches, thsd sq m 652 282 131.5 Operating performance in 2022 In 2022, thanks to the lucrative acquisition of YIT Russia, Etalon Group entered five new regions and delivered 735,000 sq m, a record figure in the company’s history. In addition, the company launched sales of more than 650,000 sq m, doubling the 2021 figure. Sales totalled 423,000 sq m, or RUB 71.8bn, and were affected by the macroeconomic environment. However, at the end of 2022, sales started to grow again thanks to the launch of a more affordable product and the extension of the government’s subsidised mortgage programme. In the future, sales will be driven by an increased supply of a high-margin product with optimised costs and improved features. Active portfolio expansion, higher product affordability, new launches and innovative technologies will further support the achievement of company’s business growth targets. Progress made so far towards 2024 strategic targets 2024 target Current status 1 Portfolio growth 6m+ sq m of NSA on a continuous basis Presence in at least eight regions Current project portfolio has over 6.4m sq m of NSA 2 Company operates in eight regions (Moscow, Moscow region, St Petersburg, Omsk, Novosibirsk, Yekaterinburg, Tyumen and Kazan) Pre-PPA 3 gross margin 35% until 2024 38% in 2022 Net corporate debt / pre-PPA LTM EBITDA 2x–3x 0.77х as of 31 December 2022 Leadership in human capital, technology and innovation development Best in class Etalon Group relies on innovative technologies and develops state-of-the-art industrial house- building technologies and advanced software to create a quality product and have a leading position in the market Etalon Group demonstrates consistent execution of its strategy, being a leading technology-driven federal player with a large-scale portfolio of projects. Location Area Wings Moscow 169 Che Quarter, Chernigovskaya St St Petersburg 110 Galactica, building 9.3 St Petersburg 79 Silver Fountain Moscow 50 Nagatino i-land Moscow 47 Moscow Gates II (Galactica) St Petersburg 47 Emerald Hills Moscow region 43 Novoorlovsky St Petersburg 43 Domino St Petersburg 29 Progress on specific projects Regional projects, thsd sq m Location Area Green Kazan 24 Rifey (Riphean) Yekaterinburg 19 Baltym Park Yekaterinburg region 10 In 2022, Etalon Group delivered 735,000 sq m in 19 projects, including three projects in new regions: Kazan and the Yekaterinburg region. In addition, the company launched sales for new buildings in four projects in St Petersburg, five projects in Moscow and six projects in other regions in 2022. Largest completed projects in Moscow, the Moscow region and St Petersburg, thsd sq m 82 83 SISTEMA PJSFC Annual report 2022 sistema.com Results of key assets Medsi is Russia's biggest national private healthcare platform offering a full range of medical services, from primary and ambulance care to high-tech diagnostics, complex surgeries and rehabilitation programmes, as well as a broad range of services aimed at improving the quality of life. medsi.ru Sistema's effective stake brand recognition in Moscow 72 % total area of assets 298 thsd sq m m share of private healthcare market in Russia 4 % clinics 13 0 > regions of operation 12 patient visits > 12 beds doctors 4.7 thsd 1,190 Business model No 1 among Russia's top 20 private healthcare companies in 2022 according to Forbes Regional patients For high-tech medical care under the OMI Hospital 3 (Michurinsky) Home care Laboratories Clinics in regions Digital platform/ ecosystem Self-pay patients Occupational healthcare (corporations) OMI VMI (Individuals) Hospital 4 (Children's) PPP with regions (OMI stream) Adults and children clinics in Moscow and Moscow region Hospital 1 (Otradnoye) Hospital 2 (Botkinskaya) Regional hubs Offering advanced diagnostics and day care services (CDC) Medsi is a three-tier medical platform that provides a broad array of care services, from preventive health improvement programmes to complex high-tech surgeries and rehabilitation. Medsi's three-tier medical platform offers a full range of services with a significant potential for cost-cutting synergies. An effective patient routing system and vertically integrated centres of excellence enable a continuous care cycle relying on uniform corporate standards and superior efficiency. The key priority in improving the business model is the development of a digital platform that is both a means of communication and a backbone used for adding ecosystem products for patients and doctors. MEDSI 84 85 SISTEMA PJSFC Annual report 2022 sistema.com Results of key assets Strategic positioning: ▪ Personalised model of P5 medicine ▪ Full cycle medical platform (from healthy lifestyle to high-tech healthcare) ▪ National scale 1 The lifetime value of a single patient is an estimation of the net profit that the entire future relationship with the patient can generate. SI MEDICINE OF COMPETENCY SI MEDICINE OF COMPETENCY SI MEDICINE OF COMPETENCY SI MEDICINE OF COMPETENCY SI MEDICINE OF COMPETENCY Ecosystem Medsi is on its way to transform its business model from a conventional healthcare provider to an ecosystem of personalised healthcare and healthy living. Key advantages of the ecosystem Sports Psychology Check-ups Wellness gadgets Education Food and vitamins Clinics and hospitals Pharmacy Telemedicine Home hospital Genetics Monitoring devices Retreats Telerehabilitation Continuous medical monitoring Medsi`IT P r e v e n t i o n a n d h e a l t h y l i f e s t y l e D i a g n o s t i c a n d t r e a t m e n t D i a g n o s t i c a n d t r e a t m e n t Customised data-driven offers Customer app zdravsiti THIRD OPINION Multiplier effect on business capitalisation: ▪ Premium to multiples of traditional healthcare providers due to accelerated growth and business scale ▪ Additional premium due to business digitalisation Synergistic effect on the key business: ▪ Increase in the number of services per patient: growing LTV 1 of each patient through additional products ▪ Expansion of custsomer base: synergistic effect for the adjacent business segments ▪ Improving clinical efficiency: increasing quality through integration and management of medical statistics ▪ Improving operational efficiency: economy of scale through a single platform 86 87 SISTEMA PJSFC Annual report 2022 sistema.com Results of key assets Russia's commercial healthcare market in 2022, %1 2023 2024 2021 2022 2020 2019 2018 2017 ACTUAL FORECAST 218 232 250 243 322 355 379 401 358 395 441 419 518 557 609 661 576 627 691 662 840 912 988 1,062 1 Source: BusinesStat research: “Analysis of the healthcare services market in Russia, Moscow, the Moscow region in 2017–2021, forecast for 2022–2026. Market prospects in conditions of sanctions”. Industry overview for 2022 Assets overview Clinicodiagnostic centres (CDCs) 2021 7 2 27 2 3 1 49 91 7 2 44 2 2 1 75 133 2022 Children's clinics Primary care clinics in Moscow Hospitals Wellness centres and retreats Home care Regional clinics Total +17 -1 +26 +42 5 Perm 1 Nizhnevartovsk 1 Nyagan 24 Volgograd 1 Bryansk 1 Barnaul 4 Izhevsk 3 Saint Petersburg 1 Rostov-on-Don 8 Ufa +20 Perm +1 Nizhnevartovsk +1 Nyagan +1 Barnaul +1 Izhevsk +1 Saint Petersburg +1 Tuapse In 2022, Russia's market of commercial medical services (legal commercial healthcare + VMI) grew by 8.6% in value terms, to RUB 912bn, with Moscow and the Moscow region accounting for RUB 355bn (39%). The self-pay segment (legal commercial healthcare) is still the biggest segment in the structure of commercial healthcare. It grew by 8.9% in 2022, from RUB 642.4bn to RUB 699.5bn. The segment's share was 65% in Moscow and the Moscow region and 77% in Russia. The value of the voluntary medical insurance (VMI) market was up 7.6% year-on-year, to RUB 212.4bn, despite a 3% decrease in patient visits. The average transaction value (ATV) has risen mostly due to the growth in general and healthcare inflation. According to BusinesStat, the ATV increased by 13% in the self-pay segment and by 11% in the VMI segment in 2022. The events of February 2022 and the following introduction of sanctions put significant pressure on the healthcare and adjacent markets. Growing uncertainty created risks both on the demand and the supply side. Restrictions on import and export transactions, cross-border payments, and the decision of foreign counterparties to stop cooperation and go back on agreements created the risks of shortage of drugs, medical equipment and consumables. Exit of foreign businesses from Russia and emigration of population with purchasing power posed a threat of growing unemployment, falling consumer spending and, as a consequence, shrinking demand for medical services in the self-pay and voluntary insurance segments. Despite the forecasts, structural changes in the economy were not of critical importance. Consumer price index in the healthcare segment was below traditional inflation and averaged at 10.2%. 23 55 77 45 35 57 65 43 Market Russia Moscow and Moscow region MEDSI MEDSI Market Self-pay VMI Commercial healthcare market by region, RUB bn 1 Moscow and Moscow region Russia’s regions 88 89 SISTEMA PJSFC Annual report 2022 sistema.com Results of key assets 1 Source: BusinesStat research: “Analysis of the healthcare services market in Russia, Moscow, the Moscow region in 2017–2021, forecast for 2022–2026. Market prospects in conditions of sanctions”. 1 Source: BusinesStat research: “Analysis of the healthcare services market in Russia, Moscow, the Moscow region in 2017–2021, forecast for 2022–2026. Market prospects in conditions of sanctions”. Medsi's position in commercial healthcare market The Russian healthcare market is highly fragmented. The share of TOP-5 private medical networks in the Russian healthcare market in 2022 was 13.0%. For Medsi, 2022 was a successful year. Despite the unfavourable macroeconomic environment and high uncertainty, Medsi achieved growth in most of its financial and operational indicators by increasing the utilisation rate of its current medical assets in Moscow and the Moscow region and delivered a considerable improvement in the performance of its regional clinics launched in 2021 and 2022. The total number of patient visits increased to 12.8m people (+26.5%). The main growth drivers were the self-pay and VMI segments, whose revenue rose by 15% and 24% respectively and patient visits increased by 35% and 22% respectively. The average transaction value decreased by 4.6%, from RUB 2,954 to RUB 2,817 due to negative performance in the OMI (–14.5%) and self-pay (–14.6%) segments. Medsi's market share in Moscow and Moscow region, % 1 2021 2021 2022 2022 4.5 5.0 6.3 6.6 Revenue Patient visits Medsi's market share in Russia, % 1 2021 2021 2022 2022 1.9 1.8 1.8 1.3 Revenue Patient visits VMI segment The company reported growth in revenue and patient traffic. Medsi's revenue in the VMI segment increased by 24.3% amid an overall growth of 7.6% in Russia. At the end of the year, Medsi's market share in the VMI segment was estimated at 7.7% in Russia as a whole and 10.9% in Moscow and the Moscow region. Medsi's market share in Russia, %1 2021 2021 2022 2022 7.7 6.7 17.5 13.9 Revenue Patient visits Medsi's market share in Moscow and Moscow region, % 1 2021 2021 2022 2022 7.7 6.7 31.0 26.6 Revenue Patient visits OMI segment Medsi reported robust growth in the OMI segment. Medsi's revenue in the segment rose by 23% year-on-year, while the overall growth in the Russian market was 16.2%. At the end of the year, Medsi's share (of total market value) in the OMI segment increased slightly and was estimated at 0.2% in Russia as a whole and 1.2% in Moscow and the Moscow region. Medsi's market share in Russia, %1 2021 2021 2022 2022 0.21 0.20 0.015 0.011 Revenue Patient visits Medsi's market share in Moscow and Moscow region, % 1 2021 2021 2022 2022 1.2 1.1 0.1 0.1 Revenue Patient visits Retail segment Self-pay patients (legal commercial healthcare) The company reported strong results in the self-pay segment, both for revenue and patient traffic. Medsi's revenue in the segment was up 15.3%, well ahead of the market average of 8.9%. By the end of the year, Medsi's share in the self-pay segment was estimated at 1.9% in Russia and 4.5% in Moscow and the Moscow region (of total market value). + 15.3 % Medsi's revenue, well ahead of the market average growth of 8.9% + 23 Medsi's revenue growth in the OMI segment % + 24.3 Medsi's revenue growth in the VMI segment % 90 91 SISTEMA PJSFC Annual report 2022 sistema.com Results of key assets Business development in 2022 Key events in 2022 Medsi's operating performance 2022 2021 Change,% Total floorspace, thsd sq m 298.2 279.0 6.9 Medical floorspace, thsd sq m 136.9 127.2 7.6 Average transaction value, RUB thsd 2.8 3.0 (6.0) Hospital occupancy, % 78 87 (9.2) Clinic occupancy, % 57 53 4.4 Services, m 26.6 21.0 26.3 Patient visits, m 12.9 10.1 27.3 Hospital bed days, thsd 238.2 268.8 (11.4) Avg. hospital cheque, RUB thsd 39.7 32.2 23.5 Visits to clinics, m 12.3 9.7 27.2 Avg. clinic cheque, RUB thsd 2.0 2.0 (1.1) Revenue by channel 56 37 55 38 5 4 3 3 Insurance companies, % Individuals, % Corporate, % Other, % 28 37 30 34 30 30 5 6 Hospitals, % Primary care clinics % CDC, % Other, % Revenue by asset type In 2022, floorspace expansion was mostly driven by the opening of new clinics and the acquisition of the LabDiagnostika chain in Perm. A drop in the average transaction value was due to reduction of the average cheque in the outpatient segment amid the growing share of regional and outpatient clinics in the structure of medical services. The occupancy rates of clinics improved primarily due to more effective occupancy management at the existing clinics and gradual commissioning of new clinics. A lower occupancy of hospitals is due to a reduction in the number of patients receiving chemotherapy in day care facilities as limits were set for OMI volumes. The number of patient visits and medical services increased due to the expansion of the chain of clinics and the high quality of healthcare provided, as well as due to the efforts aimed at increasing the number of returning patients and the frequency of extra payments made by insurance patients. The highest demand was demonstrated in the lab and instrumental diagnostics segments, as well as dentistry and gynaecology. In 2022, revenue related to COVID-19 treatment amounted to 34% of the previous year's indicator. At the same time, the 360-degree medicine concept proved a success, COVID- 19 cases were fully replaced with routine care, while revenue increased significantly for all types of assets and sales channels. Revenue from lab diagnostics amounted to 101% of the 2021 level due to paying greater attention to medical examination standards. Chain expansion Centres of excellence In May 2022, Medsi bought 18 clinics of the LabDiagnostika chain in Perm with a total area of 2,524 sq m. The transaction allowed Medsi to bolster its presence in the private healthcare market in the Perm region by increasing its outpatient capacity. Medsi continued developing its chain in the Moscow region: 16 primary care, Smart and SmartLab clinics were opened. As part of its regional development strategy Medsi opened eight clinics of different formats in Barnaul, Bryansk, Izhevsk, Nizhnevartovsk, Nyagan, Perm and Saint Petersburg. Medsi opened two clinics in Moscow and Tuapse under a franchise agreement. Medsi launched the operations of its multi-specialty medical centre (MMC) in the Michurinsky avenue with a total area of 33,475 sq m. The company's total investments in the project exceeded RUB 8bn. Medsi commissioned a new block in its hospital in Otradnoye consisting of a 100-bed 24-hour hospital and a 60-bed day care hospital. Medsi launched two occupational healthcare projects as part of its contracts for managing medical centres. Medsi and the government of the Nizhny Novgorod region announced their plans to open Russia's first large medical centre built under a public private partnership contract. Medsi opened its second personalised medicine centre Medsi Premium in its multi- purpose medical centre (MMC) in Michurinsky avenue in Moscow. Medsi launched its second children's hospital on the basis of MMC in Michurinsky avenue in Moscow with a total area of more than 4,000 sq m. The children's hospital can admit about 300 patients a month and 3,600 patients a year. Provision of high-tech medical care in the area of x-ray-endovascular surgery by using state-of-the-art equipment subsidised by the government. Application of new medical technologies in neurosurgery, otolaryngology, ophthalmology, bariatric surgery and oncology. Application of new digital technologies (artificial intelligence, augmented reality, remote monitoring) in dentistry, surgery, urology and cardiology. More than 100 new genetic research projects in the Centralised Lab. New services and technologies 2022 2022 2021 2021 35,978 35,978 30,087 30,087 RUB m RUB m RUB m RUB m 92 93 SISTEMA PJSFC Annual report 2022 sistema.com Results of key assets Digital transformation Ecosystem development LLC Medsi Digital, which owns SmartMed platform, was accredited as an IT company and became a resident in the Skolkovo innovation centre. LLC Medsi Digital is used as a platform for active development of digital solutions to speed up the expansion of Medsi's business. Transformation and harmonisation of Medsi's business processes on the basis of a single digital intelligence system. Transition to fully electronic document flow: Medsi joined forces with TerraLink to transfer 80% of operations into a digital format. An automated quality assurance system was launched in a hospital. The system is unparalleled in the market and performs the amount of work usually done by 20 quality assurance specialists. A system of automated monitoring of prescriptions in the outpatient segment was commissioned. In 2022, Medsi continued developing its online platform SmartMed. The number of unique active users grew by 22.8% year-on-year to 648,000; the number of online appointments, excluding lab diagnostics, grew by 25.5% year-on-year, to 3.1m. Expanding the range of SmartMed services: appointments for instrumental diagnostics, a lab supermarket, a partner marketplace, a chat with users, an online pharmacy (in partnership with Zdravcity). Medsi assesses its full-time and outsourced staff under 72 training programmes, with 80% of doctor specialties and 100% of nurse specialties covered by the assessments. More than 75% of Medsi's employees are taking part in training and development programmes. Medsi completed the programme for development of its succession pool. The percentage of candidates that received corporate training from the Russian Presidential Academy of National Economy and the Russian Medical Academy of Continuing Professional Education and were promoted to higher positions from the internal succession pool exceeds 90%. Medsi's Medical Academy provided training to 100% of its senior medical executives. Medsi launched "Be Healthy with MEDSI" – a well-being programme for corporate customers and partners. Medsi continued offering career guidance tours for children as part of its Medsi Friends Club activities. Medsi was for the first time included in the ESG ranking of the National Rating Agency, showing the best result among private healthcare companies. Sustainability & ESG Strategic goals Increasing market share in Moscow and Russia’s regions Vertical integration Ensuring the utilisation of new clinics opened in 2021-2022. Opening at least three clinics in Russia's regions and about 10 franchise clinics in Moscow and other regions. Launching a radiology centre on the premises of Medsi's hospital in Otradnoye with a total floorspace of 5,000 sq m. Expansion of a lab chain, creation of hub laboratories in the cities where Medsi operates: Moscow, Saint Petersburg, Volgograd, Ufa, Nizhnevartovsk, Perm. Development of strategic interaction with the banking sector and local authorities across Russia's regions as part of PPP and concession projects Expanding the scale of reference centres for radiology, ultrasound and instrumental diagnostics. Organising catering services for patients on an in-house basis. Opening new centres of excellence: scaling up a one-day hospital under the Cancer Awareness programme, extending the list of high-tech surgeries in hospitals, opening diagnostic centres specialising in positron emission tomography, surdology, phoniatrics, children's ophthalmology. Medsi's multi-pronged strategy is aimed at creating Russia's first nationwide healthcare provider offering a full range of medical services. 94 95 SISTEMA PJSFC Annual report 2022 sistema.com Results of key assets Financial performance Medsi's revenue growth by 19.6% year-on-year, to RUB 36bn, was driven by the greater workload of medical centres, opening of new clinics in Moscow, the Moscow region and other regions of Russia, development of telemedicine, lab services and home care services. Adjusted OIBDA amounted to RUB 6.5bn in 2022 vs RUB 6bn in 2021. Contribution to OIBDA from the company's participation in a JV with Capital Group for the construction of the Nebo residential complex in the Michurinsky avenue was RUB 0.2bn in 2022 compared to RUB 1.4bn a year earlier. Net income amounted to RUB 1.2bn in 2022 vs RUB 3.7bn in 2021. Improvement of operational efficiency Development of medical ecosystem and R&D 1 Streamlining procedures for referring patients from clinics to hospitals. Increasing the number of returning patients in key sales channels. Further standardisation of business processes and increased business manageability. Business analysis of medical data. Introduction of standard algorithms for commissioning new assets and integrating acquired companies. Effective management of inventories and working capital, optimisation of capital expenses through continuous oversight over investment returns. Further development of the SmartMed digital platform including medical services and specialised products related to the treatment of chronic diseases and a line of preventive healthcare products. Development of a digital interface for doctors with a focus on creating an ergonomic workplace, supporting doctors' decision-making and providing patients with personalised care. Continued introduction of biotech and genetic products into medical practices. Continued development of occupational healthcare. Implementation of a patient-centred model (5P medicine) and expansion of the product offering in the segments of biohacking and predictive medicine. Financial results, RUB m + 19.6 Medsi's revenue growth % RUB bn RUB 1.2 bn net income attributable to Sistema in 2022 vs RUB 3.7 bn in 2021 6.5 adjusted OIBDA 2022 2021 Change,% Revenue 35,978 30,087 19.6 Adjusted OIBDA 1 6,532 5,952 9.7 Operating income 2,427 3,978 (39.0) Net income attributable to Sistema 1,216 3,721 (67.3) 1 R&D - Research and Development 1 OIBDA does not include the financial results of the project for development of Nebo apartment complex. 96 97 SISTEMA PJSFC Annual report 2022 sistema.com Results of key assets Агрохолдинг « СТЕПЬ » входит в то п -6 крупнейших землев - ладельцев в Российской Федерации , земельные активы расположены на юге страны — в Краснодарском крае , Ростовской области , Ставропольском крае — в наиболее благоприятных сельскохозяйственных регионах с точки зрения климата , урожайности , близости к ключевым экс - портным портам . Наличие качественных земельных активов вблизи экс - портных портов обеспечивает более высокую опера - ционную эффективность сегмента « Растениеводство », а собственная сырьевая база и логистические мощно - сти создают конкурентные преимущества для развития агротрейдинга . В « Молочном животноводстве » компания удерживает лидирующую позицию в России по уровню надоя на одну корову и операционной эффективности бла - годаря ведению эффективной племенной работы и вне - дрению современных технологий Steppe AgroHolding is one of Russia's biggest vertically integrated agricultural players with 578,000 ha of land and a diversified portfolio of assets. Business model No 1 No 1 No 1 No 1 Traiding in niche crops Sugar & groceries trading Dairy farming Packaged cheese 1 14.3 1 2.0 1 0 149 in Russia by milk yield per cow lactating cows as of end of 2022 in Russia by niche crop exports of crops harvested in 2022 grain exporters in Russia of milk produced in 2022 No No TOP thsd t thsd . m t thsd t thsd t thsd t thsd t 289 358 149 50 Sales Sales Gross yield Sales top 10 Grain trading m t in Russia in Russia by milk yield per cow in Russia independent traider 1.7 Sales No6 Crop farming thsd ha in Russia 578 Land holdings No 6 in Russia by land area 1 Sistema's effective stake 89.7 % ahstep.ru 1 BEFL. 2 Steppe AgroHolding plus RZ Agro Steppe AgroHolding is among Russia's top 6 land owners with its key land holdings located in the south of the country: the Krasnodar, Rostov and Stavropol regions, which are considered the most favourable agricultural areas in terms of climate, crop yields and proximity to the main export ports. The close proximity of quality land to export terminals ensures the high operational efficiency of the crop farming business, while own raw materials and logistical capacity create competitive advantages in the agricultural trading segment. In the dairy farming segment, the company remains a leader in Russia by milk yields per cow and by operational efficiency due to effective breeding and state-of-the-art technologies. Steppe AgroHolding has a vertically integrated business model with two basic segments: crop farming and dairy farming. The crop farming segment is integrated with grain and sugar & grocery trading, as well as with own logistical infrastructure. Quality assets in the dairy farming segment enable the company to process raw milk and produce pre-packaged cheeses, ingredients and dairy products. Steppe AgroHolding 98 99 SISTEMA PJSFC Annual report 2022 sistema.com Results of key assets Industry overview for 2022 Gross grain and grain legume harvest in Russia, m t 121.4 133.5 121.2 113.3 135.5 120.7 104.7 105.2 92.4 70.9 157.7 2022 2021 2020 2019 2018 2017 2016 2015 2014 2013 2012 51.5 45.6 45.4 56.0 37.0 35.4 32.0 43.3 2021–22 2020–21 2019–20 2018–19 2017–18 2016–17 2015–16 2014–15 Sources: RosStat, UISIS. Grain trading Russian grain exports in the 2021/2022 crop season (including exports to the Eurasian Economic Union, or EAEU) totalled 43.3m t, down by 15.9% year-on-year. Russia is the world's leading wheat exporter, with its total export volumes in 2021/2022 reaching 33m t (including exports to the EAEU). In the first half of the 2022/2023 crop year, Russia exported 24.3 m t of wheat, up by 12% year-on-year. The positive dynamics of exports is due to the record harvest of grain crops in 2022. The main export destinations for Russia's agricultural crops are countries in the Middle East, Africa and Southeast Asia. The key importing countries are Turkey, Egypt, Iran, Saudi Arabia. Grain exports (EAEU included), m t 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 31.2 29.9 30.0 29.9 29.8 30.2 30.6 31.4 32.2 32.3 33.0 14.8 16.4 14.4 15.6 14.7 15.2 15.1 14.7 15.7 14.5 16.2 14.4 17.0 14.4 17.9 14.3 18.2 14.2 19.0 14.0 14.0 15.8 Source: RusAgroTrans Crop farming In 2022, Russia reported a record-high harvest of grain and grain legumes, with gross harvest amounting to 157.7m t, a 29.9% increase from 2021 and a 16.3% increase from the previous record crop of 2017. The 2022 wheat harvest was 104.2m t, a 37% rise year-on-year. The high grain production output was driven by the growth of crop yields, favourable climate conditions in the key grain-producing regions and expansion of the cultivated area. The total grain and grain legume field areas increased by 1.1%, from 47m ha in 2021 to 47.5m ha in 2022. At the same time, the agricultural sector was impacted by major changes in the market situation, rising prices for machinery and equipment. However, big agricultural producers with a high level of operational efficiency were able to quickly adapt to the changing environment and achieve high production results. In general, the crop farming industry proved highly resilient to the changing conditions and ensured Russia's all-time record harvest. Governmental support and stable state subsidies for agricultural producers were important growth drivers for the industry. Russia is witnessing a hike in land prices amid investors' growing interest in farmland. Amid changing market conditions investors view land assets as a way to preserve capital. Land remains attractive for investors due to such long- term factors as continuous growth of demand for agricultural products, increasing consumption of food and limited land resources. 157.7 m t in 2022, Russia reported a record-high harvest of grain Dairy farming Russia's raw milk output continued growing steadily in 2022 with farms of all categories producing 33.0m t of raw milk, a 2% increase from 2021. In 2022, the raw milk output of agricultural companies increased by 4.7%, up to 19m t. Agricultural companies account for 58% of all milk produced in Russia, the rest coming from private farms and households. In 2022, the output of raw marketable milk in Russia is estimated to have increased by 3.7% compared to 2021, up to 24.6m t, which accounts for 75% of total milk produced. The dairy industry has significant potential for further growth to be able to provide the milk processing enterprises with high- quality raw milk. The dairy farming sector remains attractive for investors due to continued stable growth. The launch of new dairy farms and enhanced productivity are driving the growth of milk production. The average milk yield per cow in the corporate segment rose by 6.7% in 2022, reaching 7.6 t per cow a year, with milk yields of the most productive dairy enterprises exceeding 15 t of milk per cow a year. Milk output, m t Source: RosStat Corporate farms Other 100 101 SISTEMA PJSFC Annual report 2022 sistema.com Results of key assets 2015 2016 2017 2018 2019 2020 2021 2022 622 638 641 670 761 817 906 917 453 169 459 178 464 177 467 203 540 221 572 245 648 258 669 248 Per-cow milk yield in the corporate sector, kg per year 7,644 2022 7,162 2021 6,872 2020 6,492 2019 6,091 2018 5,871 2017 Sources: UISIS, SoyuzMoloko. Total lactating cows across farm categories, thsd Sources: UISIS Fruit growing Sources: RosStat, UISIS. 24.6 m t in 2022, the output of raw marketable milk in Russia Gross pomaceous fruit harvest grew by 11.3%, to 2.9m t in 2022 due to an increase in yield indicators and the orchards gradually reaching the design capacity. That said, the area of perennial pomaceous fruit plantings was down to 227,000 ha. Russia's fruit growing sector has a substantial potential for growth through increased domestic apple production and import substitution, as the market is highly dependent on imported goods with import accounting for 20% of total consumption. Cheese market Cheese consumption in Russia, thsd t Source:Rosstat, SoyuzMoloko. The Russian cheese market has good prospects for further expansion due to the government's import substitution policy, growing cheese consumption per capita, a greater market share of pre- packaged cheese and development of the fast food segment with cheese as a necessary ingredient. By the end of 2022, the market of cheeses proved to be one of the fastest growing segments of the dairy industry, according to preliminary official data, the volume of cheese production increased by 3% to 669,000 t. The cheese market has the potential for growth through an increase in domestic production and replacement of imported goods, which accounted for 27% of total consumption in 2022. The growth in raw milk output creates a production base for milk-intensive product categories and is an important driver of cheese production. Cheese consumption in 2022 totalled 917,000 t, up 1.3% from the previous year. 2022 7,719 3 ,221 4,499 2021 7,784 3,227 4,557 2020 7,898 3,271 4,627 7,964 4,690 2018 7,942 3,283 4,659 2017 7,951 3,316 4,635 2016 7,966 3,359 4,607 2015 8,115 3,387 4,728 2014 8,263 3,439 4,824 2013 8,431 3,533 4,898 2019 2012 8,657 3,640 5,017 3,274 Gross pomaceous fruit harvest and imports of apples in Russia, thsd t 2022 2021 2,607 616 2,904 592 2020 2,342 646 2019 2,179 696 2018 1,997 845 2017 1,521 710 2016 1,726 678 2015 1,495 892 2014 1,597 1,050 2013 1,527 1,352 2012 1,278 1,388 Gross pomaceous fruit harvest Apple imports Output Net import Corporate farms Other 102 103 SISTEMA PJSFC Annual report 2022 sistema.com Results of key assets Steppe's market positions in key segments In 2022, Steppe AgroHolding achieved a robust growth in its key indicators: it gathered a record harvest of 2m t of agricultural crops, gross milk output increased up to 149,000 t and the company asserted its leadership in terms of milk yield per cow. Despite the changing market situation, Steppe AgroHolding maintained high export volumes of agricultural crops. The company remains one of the top 10 grain exporters in Russia and a leading exporter of niche crops. Crop farming Steppe AgroHolding is one of the six largest land owners in Russia with 578,000 ha of total land holdings and a high share of land in ownership and long-term lease. The land is located in the most favourable agricultural areas in close proximity to the largest export terminals, providing the company with considerable competitive advantages amid growing logistical costs. In 2022, the company's gross crop yields totalled 2m t (+9.2% year-on-year), including 1.1m t of wheat. Such record results became possible due to the effective work of the management team and strict compliance with technological standards, introduction of cutting-edge solutions and application of state- of-the-art machinery. Over the last three years, Steppe AgroHolding has been implementing a large-scale import substitution programme in the crop farming segment, making it possible to significantly increase the share of domestically produced equipment in the procurement structure. Steppe AgroHolding uses only domestically produced seeds for its main crops, while the share of the Russian-made plant protection products rose to 90%, with the Russian-made machinery accounting for up to 80% of the entire fleet of vehicles. Dairy farming Steppe AgroHolding is one of the Russia's leading companies operating in the dairy farming segment. The company has seven modern dairy farms equipped with a centralised system of online monitoring. In 2022, the farms of Steppe AgroHolding remained leaders in terms of milk yield per cow and made it to the first place in the ranking of the Russia's dairy farms. In 2022, Steppe AgroHolding reported a significant growth of gross milk yield: milk production output surged by 71% to an all-time high of 149,000 t. The total number of lactating cows at the end of the year was 14,307 head (+38% year-on-year). At the end of the year, the company's total cattle herd increased to 30,762 head. Steppe AgroHolding continues intensive development of the dairy farming segment by implementing projects for building new dairy farms and enhancing the efficiency of existing farms. Business development in 2022 Grain trading and logistics In 2022, the total sales of agricultural crops in the trading segment were estimated at 1.7m t. Despite considerable changes in the market environment, the management team was able to maintain high sales figures. The main focus of the segment's development in 2022 is international trade in agricultural products. During the year, the company improved logistical chains, built new delivery routes and ensured access to new markets. The management team's effective work ensured that Steppe AgroHolding achieved high export growth rates and maintained its leading positions in the ranking of the largest grain exporters of Russia. Trading in niche crops The sales of niche crops in 2022 amounted to 289,000 t, a 39% increase from 2021. In the first half of the new 2022/2023 crop season, Steppe AgroHolding became the Russia's biggest exporter of peas. Among the main drivers of the robust sales growth were expansion of the range of exported products and entry into new markets. Trading in sugar and groceries Sugar and grocery trading is a logical extension of the crop farming business, where Steppe-grown beets are processed into Steppe-traded sugar. Total sales in the sugar and groceries segment in 2022 reached 358,000 t, 17% higher than in 2021. The sales increased on the back of growing wholesale volumes and higher sales of packaged products. In 2022, the sales of packaged goods increased by 28% and totalled about 30,000 t. Production of pre-packaged cheese and distribution of dairy products In 2022, the company continued to gradually develop its production of pre-packaged cheese and distribution of dairy products. The total sales of pre-packaged cheeses and dairy products exceeded 50,000 t. In view of the volatile market environment, the company focused on the most promising segments, while ensuring the development of new businesses, such as trading in dairy ingredients. Source: Steppe AgroHolding's data Steppe AgroHolding's gross milk yield, thsd t Source: Steppe AgroHolding's data 149 2022 87 2021 71 2020 57 2019 47 2018 Steppe's sales of sugar and groceries, thsd t Source: Steppe AgroHolding's data 358 2022 306 2021 330 2020 307 2019 176 2018 Steppe AgroHolding's grain exports, thsd t Source: Steppe AgroHolding's data 1,715 2022 1,761 2021 1,200 2020 1,198 2019 1,115 2018 269 2017 Steppe AgroHolding's sales of packaged goods (sugar and groceries, thsd t 29.7 2022 23.2 2021 18.3 2020 12.7 2019 0 2018 104 105 SISTEMA PJSFC Annual report 2022 sistema.com Results of key assets Financial results, RUB m 2022 2021 Change,% Revenue 83,679 57,150 46.4 Adjusted OIBDA 14,483 14,368 0.8 Operating income 9,757 11,234 (13.1) Adjusted Net income 3,528 7,505 (53.1) In 2022, revenue grew by 46.4% year-on-year, up to RUB 83.7bn, mainly due to higher sales in the trading business segments (trade in agricultural products, niche Steppe AgroHolding's gross harvest (RZ Agro included), thsd t 2022 2021 Change,% Wheat 1,093.7 965.1 13.3 Barley 60.4 45.3 33.3 Sunflower 77.5 96.3 (19.6) Peas 53.4 88.1 (39.4) Corn 39.7 51.4 (22.7) Beets 361.0 338.7 6.6 Other crops 302.3 236.0 28.1 Total 1,988.0 1,820.8 9.2 Steppe AgroHolding's production results, thsd t 2022 2021 Change,% Milk production 148.8 87.1 70.8 Grain trading sales 1,715.0 1,761.4 (2.6) Sugar and grocery trading sales 357.6 306.1 16.8 Packaged product sales (sugar & groceries) 29.7 23.2 28.0 Niche crop trading sales 289.1 207.8 39.1 Financial and operational performance in 2022 Development strategy Expansion of land holdings by acquiring quality land plots in the southern and other regions of Russia, adopting new technologies, including AI and autonomous vehicles Intensive development of the dairy farming segment, construction of new dairy farms and boosting milk production volumes Development of international agricultural trading (including trade in niche crops), increasing exports and broadening the geography of sales Boosting sales volumes in the sugar and groceries trading segment by expanding the product range and increasing the sales volumes of pre-packaged goods under own brand Increasing the production and sales of pre-packaged and slice-on-slice cheese Developing milk processing projects and production of plant- based protein Steppe AgroHolding's development strategy is aimed at further development of company's key business lines, which involves crops, sugar and groceries). This growth became possible due to intensive development of international agro trading and adoption of an effective sales strategy (including in the domestic market), as well as increased milk sales in the dairy farming segment and development of such new business segments as production of pre-packaged cheese and distribution of dairy products. Adjusted OIBDA went up by 0.8% year-on-year, reaching RUB 14.5bn. Despite significant market volatility, OIBDA remained high due to positive results in the dairy farming segment, enhancement of operational efficiency in the trading segment and development of pre-packaged cheese production and milk distribution. In 2022, Steppe's Capex totalled RUB 4.1bn. Most of it went towards the construction and upgrade of dairy farms and acquisition of agricultural equipment. 106 107 SISTEMA PJSFC Annual report 2022 sistema.com Results of key assets representative offices 6 binnopharmgroup.ru Business model Production: Product portfolio: Promotion: The Centre will employ 450 people. By 2025, Binnopharm Group expects to launch more than 100 new products in rheumatology, neurology, gynaecology, paediatrics, etc. development of biotech drugs development of synthetic drugs Research and development: Revenue by sales channel, 2022 10 % 18 % 72 % RUB bn 28 Retail segment Public procurement Export Retail portfolio structure, 2022 16 % 41 % 43 % RUB bn 28 Branded generics Original drugs INN generics Revenue breakdown by product type 2022 , 20 % 4 % 27 % 8 % 12 % 14 % 16 % RUB bn 28 Antibiotics Gastroenterology Phlebology Musculoskeletal disorders Cardiology Cold Other Revenue by dosage form, 2022 41 % 12 % 14 % 8 % 3 % 5 % 17 % RUB bn 28 Tablets Powder Solutions Capsules Gels Creams Other Key figures Binnopharm Group is a leading Russian pharma company that manages production facilities in different regions of the country and produces a broad range of high-quality affordable medications. on the Russian retail pharma market 1 0 among domestic producers of the Russian retail pharma market Source: Alpharm 2 TOP marketing authorisations obtained in 2022 34 of products made from own substances 2 0 medication packs produced in 2022 37 0 m % new TOP production facilities 5 segments 13 in the CIS export qty market authorisations for drugs in Russia 45 0 > ~ Sistema's effective stake Binnopharm Group has five production sites in different regions of Russia: JSC Alium (Obolensk, the Moscow region), JSC Binnopharm (two sites: Zelenograd and Krasnogorsk), PJSC Sintez (Kurgan) and JSC Biocom (Stavropol). In aggregate, these production facilities manufacture products in more than 200 pharmaceutical groups in various dosage forms (tablets, capsules, ointments, gels, suppositories, infusion solutions, etc), or over 370m packs per year. The Group's diversified portfolio comprises more than 450 marketing authorisations for drugs in the following major medical areas: gastroenterology, cardiovascular diseases, respiratory diseases, infectious diseases, neurology and musculoskeletal disorders. More than 100 drugs from Binnop- harm Group's portfolio are included in the government's list of vital and essential drugs. Binnopharm Group's key advantage is the combination of a diversified portfolio of drugs and an effective system of promotion through media tools, contacts with pharmacy chains and medical and pharmaceutical representatives. Binnopharm Group regularly develops new drugs and replenishes its portfolio. The company is completing construction of a state-of-the-art R&D centre with an area of 12,000 sq m in the Krasnogorsk district, the Moscow region. It will have two research divisions: Binnopharm Results of key assets 108 SISTEMA PJSFC Annual report 2022 sistema.com 109 Industry overview for 2022 > 1.5 expected volume of drugs and medical products produced in Russia by the end of 2030 311 projected exports of drugs and medical products by the end of 2030 Development of the Russian pharmaceutical market, RUB bn 2018 831 366 2019 915 490 2020 985 624 2021 1,109 926 2022 1,358 894 Source: AlPharm. The priorities of the government's policy in the pharmaceutical industry until 2030 include: ▪ import substitution (including production of substances, drugs from the list of strategically important products; low- margin drugs and medical products that are in high demand in the domestic healthcare segment, etc.) to ensure sustainability of drug supplies in Russia ▪ ensuring the required growth of production capacity in the pharmaceutical and medical segments to achieve the goals of the government's policy, including with the help of financing of major construction projects from the federal budget ▪ developing a mechanism for securing the high quality of drugs and medical products for the national healthcare system ▪ creating and improving conditions for developing innovative drugs and medical products The main goal of the government's Pharma 2030 programme is to increase the output of domestically manufactured drugs and medical products twofold in monetary terms by 2030 vs. 2022: up to RUB 1.5tn. This goal can be achieved by means of building scientific, technological and manufacturing capabilities in the pharmaceutical and medical industries. The government is also planning to stimulate exports of drugs and medical products, which are projected to reach RUB 311bn by 2030. Another focus area of the government's programme is organising the production of pharmaceutical ingredients. By the end of 2030, the government expects to increase the share of strategically important drugs that are fully manufactured in Russia to 90%. According to DSM Group, the Russian pharma market grew by 11.9% in 2022 vs. 2021, to RUB 2.6tn. The segment of public procurement grew by 6.9% to RUB 895.6bn and the pharmacy segment by 15% to RUB 1.7tn. Growth of the public segment was first of all supported by increased purchases of medications for the Krug Dobra foundation, which amounted to RUB 40bn. Hospital procurement grew by mere 1.3%; the biggest decline was seen in procurement of antibiotics - down 85.2% vs. 2021. COVID- 19 drugs were purchased less often, with hospitals mostly using medications they already had. Hospital procurement fell by 25% in packs, driven down mostly by antibiotics (-85%) and plasma substituting and perfusion solutions (-74.4%). In the retail segment, consumption in physical terms remained at the level of 2021, with growth coming from inflation and a shift of the consumption structure towards more expensive drugs. The weighted average price of a pack grew by 18% in 2022, exceeding RUB 300. The markup of pharmacy chains was less than 25%. The most frequently bought medications were in the price segment of RUB 150–500. Prices of drugs costing more than RUB 500 demonstrated the highest growth, 33%. Prices of vital and essential drugs grew by 1% and of other medications by 12.5%. The number of pharmacies in Russia continued growing: at the end of 2022, the country had 69,500 pharmacy outlets, according to DSM Group. The increase in the number of outlets was driven by national pharmacy chains, whose share continues growing year after year. Retail segment Public procurement 11.9% the Russian pharma market growth in 2022 according to DSM Group RUB tn RUB bn 110 111 SISTEMA PJSFC Annual report 2022 sistema.com Results of key assets Business development in 2022 Company strategy and external challenges At the beginning of 2022, the Russian pharma market encountered numerous challenges. The key ones were turbulent demand at pharmacies in March-April 2022, a drastic decline in consumption of drugs used for COVID-19 treatment and difficulties with international shipments and logistics, the system of which changed significantly. Notably, established ties with suppliers from Europe and North America were severed, the time of delivery of raw materials increased and terms of delivery changed: the prices grew, credit limits decreased and upfront fees were introduced. The key challenges of the financial markets included high borrowing rates, suspension of factoring and difficulties with transactions encountered by major players due to the sanctions, especially those related to cross-border settlements. Binnopharm Group's strategy proved efficient and resilient to external challenges, which were unable to stall the company's development. In spring 2022, the company implemented a number of anti-crisis measures, including putting on hold its investment projects. It increased its standard inventory to ensure an uninterrupted production process and shifted focus to alternative suppliers from Asia. Binnopharm Group set up a separate division of international logistics and procurement and managed to establish new logistical chains. As a result, it relaunched its investment programmes in June 2022, now geared towards alternative manufacturers of pharmaceutical equipment. Binnopharm Group is totally ready for changes in the structure of the pharma market, and its strategy has not been altered by external factors. The company is focused on organic increase of its market share in the hospital and retail segments, further diversification of the portfolio and launch of new products. A successful strategy of promotion and more efficient sales via pharmaceutical and medical representatives are among the company's key principles of operation. Binnopharm Group develops its own active pharmaceutical substances in order to ensure competitive production costs and operating efficiency. An important part of its strategy is international expansion, greater presence in the CIS and inorganic growth via M&A deals. Expansion of product portfolio In 2022, Binnopharm obtained 34 marketing authorisations in Russia and registered more than 17 drugs in export regions. About 80% of registration dossiers of Binnopharm Group's medications were brought in line with the requirements of international agreements and enactments forming the laws of the Eurasian Economic Union. In February 2022, Binnopharm Group signed an agreement with the international pharma company Dr Reddy's on acquisition of rights for two antibacterial drugs, Ciprolet and Levolet, in Russia, Uzbekistan and Belarus. Acquisition of these drugs strengthened Binnopharm Group's leadership in the antibiotics market, which is a key segment for the company. In June 2022, Binnopharm Group launched a new haemostatic medication, Venaproct Alium suppositories, expanding its portfolio of vein tonics, which includes Venarus and Angiorus tablets and gels. In July 2022, Binnopharm Group launched Alfaxim, the first Russian drug with rifaximin as the active pharmaceutical ingredient. The drug is manufactured at the Alium plant in the Moscow region. In the first half of 2022, Binnopharm Group's production facilities received nine marketing authorisations for antibiotics, diuretics, haemostatic drugs and other medications. New additions to the company's portfolio of antibacterial drugs - doripenem and imipenem, which are used for treatment of severe hospital infections - meet the current needs of the Russian healthcare system and provide treatment 34 authorisations were obtained in Russia in export regions 80% of registration dossiers of Binnopharm Group's medications were brought in line with the requirements of international agreements and enactments forming the laws of the EEU. 17 drugs were registered for millions of patients. The portfolio was also supplemented with state-of-the-art medicines from other categories, e.g. diuretics (Torasemide) and haemostatic drugs (Tranexamic acid). In December 2022, Binnopharm Group began producing a new drug for sore throat, Lorothricin-Alium. It is a new combined drug in form of lozenges. It can be used for treatment of main throat and mouth diseases, such as pharyngitis, tonsillitis, laryngitis, stomatitis and gingivitis. Upgrade of production facilities Binnopharm Group began modernisation of the Sintez production facility in Kurgan. The project envisages reconstruction of production shops with the help of engineers and designers of the Industry and Trade Ministry's State Institute of Drugs and Good Practices, construction of a high- tech warehouse, upgrade of equipment, including a freeze drier, and commissioning of a new drug packaging line. Investment in the upgrade of Sintez will amount to some RUB 3bn. In February 2022, the company completed renovation of the section of the Sintez plant that produces syrups and suspensions, increasing its production capacity threefold, to RUB 6m bottles per year. In February 2022, Binnopharm Group started design works at Sintez in order to build a modern GMP/GDP pharmaceutical warehouse facility that will store raw materials and finished products. The warehouse will be divided into five areas with different temperature regimes. It will also have a temporary warehouse for customs clearance, which will significantly optimise the logistics of delivering imported materials to the plant. The upgrade also envisages movement of a line producing infusion solutions included in the list of vital and essential drugs to the plant. In addition to the existing equipment, which bottles infusion solutions into glass bottles, the new line will bottle them into plastic bottles, making it possible to produce new medications, such as Linezolid (an antimicrobial drug) and Ropivabin (anaesthetic, ropivacaine). In the near future, the enterprise will set up a section with cutting-edge equipment which will use the freeze drying method to produce sterile active pharmaceutical substances for production of finished dosage forms. The new line will increase the output of eye drops by 50%, including by localisation of Ciprolet, an antibacterial drug the rights for which were bought by Binnopharm Group from Dr. Reddy's Laboratories Ltd. (BSE). In April 2022, the Group's production facility Alium in the Moscow region received a GMP certificate from the Eurasian Economic Union. In May 2022, Binnopharm Group installed a new blister packaging machine to the packaging shop of the small volume manufacturing section at Alium. R&D development In 2023, Binnopharm Group plans to open a state-of-the- art R&D Centre in the Krasnogorsk district of the Moscow region. The Centre will unite the research divisions of all of the company's production facilities. The project envisages setup of pharmaceutical research centres for development of synthetic and biotech drugs. Investment in the project amounted to RUB 2.5bn. The R&D Centre's capacity will enable the company to launch over 100 medications by 2025 in such areas as rheumatology, neurology, gynaecology, paediatrics, etc. International expansion Binnopharm Group registered an official representative office in Kazakhstan and opened offices in another five CIS countries: Belarus, Moldova, Azerbaijan, Armenia and Uzbekistan. This will enable the company to double its export revenue and will be the first step in building its international infrastructure. Binnopharm Group is the biggest Russian supplier of medications to the CIS and is the No 1 pharma company in the Kyrgyz Republic (according to IQVIA). 112 113 SISTEMA PJSFC Annual report 2022 sistema.com Results of key assets 1 Active pharmaceutical substances. Financial performance in 2022 Financial results, RUB m 2 2022 2021 Change,% Revenue 28,040 25,139 11.5 OIBDA 7,981 6,583 21.2 Operating income 4,668 3,994 16.9 Net income 1,521 2,226 (31.6) Revenue 2022 grew by 11.5% year-on-year, mostly due to increased sales in the retail segment and exports. Retail sales went up 25% year-on-year, driven mainly by Venarus, Neobutin, Omeprazol and Kipferon. Exports increased by 17%. In 2022, OIBDA jumped by 21.2% year-on-year amid growing revenue, tighter control over administrative and selling expenses and optimisation of the product portfolio. OIBDA margin grew by 2.3 p.p. year-on-year, to 28.5%. Net income decreased mostly due to a spike in interest expenses. In July 2022, Binnopharm Group placed its second RUB 3bn bond issue; the quarterly coupon rate was set at 10.35% p.a. By the end of 2022, net debt grew year-on-year to RUB 13.4bn due to: ▪ Temporary increase of inventory of raw materials and packaging to ensure an uninterrupted production process because of the logistical changes in the new reality. ▪ Effect from the M&A deal with Dr. Reddy's. Net debt/OIBDA is at a comfortable level of 1.7x. Inorganic growth via value generating M&A deals Operations & investment development strategy Binnopharm Group's strategic goal is to build a growing international pharmaceutical company A clear strategy aimed at ensuring a high growth rate Increasing the company's share on the fast-growing generics market in Russia Active development of the product portfolio and launch of new products, development of proprietary brands, investment in biotechnology Implementation of a successful promotion strategy enhancing the efficiency of pharmaceutical and medical representatives Preserving focus on competitiveness through low production costs and high operating efficiency (expansion of in-house production of APS 1 , efficiency of R&D) Expansion to international markets in order to build stronger presence in the CIS countries Entering the Chinese and Southeast Asian markets + 11.5 % revenue growth in 2022 115 Results of key assets 114 SISTEMA PJSFC Annual report 2022 sistema. com BPGC is a major power grid company that ensures electricity transit between the central part of the country and the Urals and power transmission and distribution to end consumers in the Republic of Bashkortostan; it is also a provider of power facility engineering and construction services. bashes.ru Business model servicing volume length of grids 362.3 89.5 thsd c.u. thsd km share of Bashkortostan's power transmission market 8 0 connections to power grids 13,88 0 share of smart electric meters / automation of electricity metering 43 headcount 7.8 Power transformer capacity 23, 0 69 MVA pcs % % thsd people Sistema's effective stake Fuel supply Power generation Sale Electricity transmission and distribution Consumption LLC Energy Retail Company of Bashkortostan etc. Renewable energy sources Thermal power plants LLC Bashkir Generating Company (Inter RAO) etc. Hydropower plants LLC Bashkir Generating Company (Inter RAO) etc. Gas Coal Fuel oil Residential buildings Office buildings Industrial enterprises Transmission grids of LLC BGC Distribution grids of LLC Bashkirenergo LLC BPGC Engineering + OTHER CONSOLIDATED ASSETS 117 Results of key assets 116 SISTEMA PJSFC Annual report 2022 sistema.com Industry overview for 2022 Growth in output and effect of tariff increases The overall supply of electricity to consumers and territorial grid operators went up 6% in 2022. The increase was mostly driven by lower impact of the OPEC+ deal. At the same time, electricity supply to households and similar categories of consumers grew by 4% vs 2021 to 4.886m kWh due to higher electricity consumption by households. Uniform (common pot) tariffs for energy transmission in Bashkortostan were indexed as follows in 2022: ▪ 5% from 1 July 2022 ▪ 12.4% for grid maintenance tariff and one-part rates ▪ 9% for rates for power loss component from 1 December 2022 The main reasons for grid tariff indexing by 12.4% instead of 9% were the growing prices of services of PJSC Rosseti (FGC) and expansion of the investment programme of the region's power grid sector. As part of the region's strategic development plan for the power grid sector, LLC Bashkirenergo (a subsidiary of BPGC) will continue using the regulated asset base (RAB) method of tariff regulation until 2030, which makes it possible to increase the average annual investment amount in 2023- 2030 by over RUB 1bn. Decrease in the number of emergency shutdowns In 2022, Bashkirenergo saw a decrease in the number of technological breakdowns (accidents). The number of accidents in 6–110 kV grids totalled 7,130, down from 7,154 in 2021. The decrease was due to the implementation of the company's investment and repair programmes. In 2023, net electricity supply is expected to slump by 139m kWh, totalling 99% of the level of 2022, including: ▪ Consumers in the oil sector - by 68m kWh (98%) ▪ Oil refineries - by 16m kWh (99%) ▪ Consumers of the guarantee supplier (legal entities) - 41m kWh (99%) ▪ Consumers of the guarantee supplier (households) - 58m kWh (99%) In 2022, power generation in Russia grew by 0.6% to 1.12tn kWh. Power generation from renewable sources grew by 38%, while increase in consumption was seen mainly in oil production and pumping, railway shipments and the aluminium industry. Electricity consumption in the Unified Energy System of Russia increased by 1.5% vs 2021 to 1.11tn kWh. A decline in consumption was registered in two district energy systems - Middle Volga and Northwest, while the remaining five systems reported a growth. The biggest growth of 3.8% was seen in the Eastern Unified Energy System. Russian electricity exports grew by 15% in 2022 vs 2021. Eastbound exports were on the rise: exports to China and Mongolia increased by 20%. Exports to China grew by 16%. In Bashkortostan, net supply of electricity and capacity in the segment of hydrocarbon production and transportation grew by 22% vs 2021, when restrictions of the OPEC+ deal were in place. Business development in 2022 + 0.6 growth of power generation in Russia in 2022 % tn kWh 1.12 electricity consumption in the Unified Energy System of Russia + 15% growth of Russian electricity export in 2022 118 119 SISTEMA PJSFC Annual report 2022 sistema.com Results of key assets 1 Unified National Power Grid. Financial performance in 2022 Financial results, RUB m 2022 2021 Change,% Revenue 23,172 20,740 11.7 OIBDA 6,339 5,443 16.5 Operating income 3,714 2,581 43.9 Net income attributable to Sistema 2,758 1,804 52.9 Revenue growth by 11.7% vs 2021 was driven by two main factors: higher electricity consumption and growth of uniform common pot tariffs for power transmission. Electricity consumption was increased by oil producers and consumers of the guarantee supplier. Common pot tariffs were indexed twice in the reporting period. Additional services related to technological connections to grids also had a positive impact on revenue. OIBDA grew by 16.5% thanks to the growth of revenue and sale of non-core assets. Net income increased by 52.9% supported by OIBDA and additional financial income. In 2022, BPGC paid RUB 1.2bn in dividends. Operating performance UoM 2022 2021 % Bashkirenergo BGC Bashkirenergo BGC Bashkirenergo BGC Energy losses % Energy losses m kWh 1,592 322 1,588 313 100 103 Power in m kWh 22,433 14,807 21,327 18,250 105 81 Net supply from distribution grids m kWh 20,841 14,485 19,740 17,937 106 81 New connections psc 13,876 4 14,706 1 94 400 Connected capacity MW 338 25 355 8 95 339 The increase in relative losses at LLC BGC was due to lower volumes of inter- regional power flows Optimisation and automation of business processes and production, plans and results of smart meters introduction In 2022, Bashkirenergo's power metering system was expanded with installation of 23,000 meters. To make up for the growing prices and delays in supply of smart meters, the company completed calibration of 18,000 meters already installed. The number of meters in the smart metering system reached 350,000 by the end of the year, or 43% of all meters. Implementation of investment programme and key investment projects The key areas of the company's investment activities were development and strengthening of the existing grids and technological connections of consumers. Investment in connections in the reporting period amounted to RUB 2.121m (hereinafter, without VAT), and in commissioning of fixed assets - RUB 2.381m. Measures were taken to ensure power supply to socially important facilities (hospitals and educational facilities), residential buildings, road infrastructure and industrial enterprises of Bashkortostan. Investment in new construction totalled RUB 521m and in commissioning of fixed assets RUB 241m. + 11.7 % revenue growth in 2022 BPGC's medium-term strategic plans were developed taking into account its long-term goals and current challenges; they envisage maintaining the value of the business and shareholder returns at the existing level with the help of the following drivers. ▪ Tariff and regulatory: lower spending on services of the UNEG 1 , indexing of tariffs in case of excess cross-subsidising. ▪ Operating: work with energy losses, ensuring quality and reliable power supply, introduction of digital technologies. ▪ Development of non-regulated business lines, first of all, leveraging the competences of LLC BPGC Engineering. ▪ In investment activities: – Development and upgrade of grids, technological connections of new consumers, creation of an information security system. – Acquisition of power grid assets in Bashkortostan (consolidation of territorial grid organisations). Strategic goals 350 thsd the number of meters in the smart metering system 120 121 SISTEMA PJSFC Annual report 2022 sistema.com Results of key assets Sistema's effective stake sistema-bn.ru Business model Business Nedvizhimost is one of the key players in Moscow's commercial real estate market, with a portfolio of 78 properties. The company owns and manages a unique real estate portfolio in Moscow and St Petersburg, including mansions in central Moscow and class B and C office and retail premises located in almost every administrative district of Moscow. credit rating (Expert RA) ruBBB+ total area of commercial properties commercial real estate 36 0 78 thsd sq m properties of properties in ownership 1 00 % % > Main focus areas: The company also develops the Olympic Star fitness club in Moscow. Asset management Facility management Property management Flexible space chain Officeless Asset management with a view to increasing the capitalisation and liquidity of assets and optimising the entire portfolio of owned and managed commercial real estate Operation and maintenance of com- mercial and residential real estate to ensure good condition and avoid accidents. Ready-made offices that meet today's business requirements: the ability to quickly accommodate employees without capital expenditures for repairs and furniture, flexible terms of rent and a full range of services Property management to improve the efficiency of its use and maximise net operating income 123 Results of key assets 122 SISTEMA PJSFC Annual report 2022 sistema.com In 2022, the aggregate offer of offices on the Moscow market exceeded 17.9m sq m, out of which class A properties accounted for 5.3m sq m and class B properties for 12.6m sq m. A total of 340,800 sq m of properties was commissioned in 2022, down 42% from 2021 (587,400 sq m); class A projects accounted for 76% of the new properties. Total commissioning of office properties in 2022 exceeded the results of the pandemic-ridden 2020 (224,400 sq m) and was a little below the results of 2019 (381,000 sq m). The share of vacancies grew by 3.6 and 1.8 p.p. in class A and class B, respectively, to 13% and 7.4%. As a result, about 690,000 sq m of class A offices and 16m sq m of class B offices stood vacant. A significant spike in vacancies was seen in Moscow's premium projects, 4.2 p.p. since the beginning of 2022 (to 13.4%), reaching the level of the end of 2020. Vacancies in class A properties grew unevenly: the growth was significant in Q2, when foreign companies were actively scaling down their business and optimising their offices, mainly in the key business districts of Moscow, and also in Q3, when a lot of new properties were commissioned. Office space absorption – a key indicator of demand demonstrating for a certain period the difference between all the space that became occupied and all the space that entered the market vacant – was negative in 2022, equalling -107,400 sq m vs. 701,500 sq m in 2021. At the same time, net absorption of class A offices was positive despite fears at the beginning of the year and totalled 46,800 sq m. In 2022, the weighted average asking rental rates for class A premises, despite the forecast decline, grew by 0.8% to RUB 26,044 per sq m per year (net of operating expenses and VAT), which was caused by uneven movement of the indicator during the year: in H1, when there was a large supply of offices in quality business centres, the weighted average asking rates grew; then, after some properties were commissioned and offered at a rate below the average market rate for class A, the average rate decreased. Supply of premises in 2022, % 49 26 26 76 22 Source: Nikoliers Commissioning of premises in 2022, % Source: Nikoliers At the end of 2022, co-working spaces opened in Moscow totalled 354,600 sq m, offering aggregately 50,600 workstations. As many as 17 new co-working spaces were opened in Moscow in 2022 with an aggregate area of 92,000 sq m, offering about 13,000 workstations for rent. The volume of new offers was 12% higher than in 2021. Source: NF group Forecasts for 2023 Source: NF group In 2022, Business Nedvizhimost continued implementation of its medium-term strategy. In line with the strategy, the company's management focused its efforts on optimising the commercial real estate portfolio to increase its liquidity and capitalisation; it was also expected to launch the Officeless co-working spaces. The company managed to lease out about 34,000 sq m in 2022. One of the key transactions was lease of the building at 52A Sirenevy Boulevard, with a fitness park with an area exceeding 3,500 sq m. Main tasks for 2023. In 2023, JSC Business Nedvizhimost plans to implement the following tasks: ▪ Launch a new Officeless location at 3 Malaya Polyanka Street in Moscow with 828 workstations. ▪ Preserve net operating income from traditional lease at 50%. ▪ Increase the efficiency of using space freed up by MGTS and maximise operating income. ▪ Sell non-core assets. ▪ Develop a JV under a revenue sharing mode. ▪ Develop a project of self-storage facilities at the company's portfolio properties. In 2023, commissioning of new properties may amount to some 473,000 sq m, with class A projects accounting for about 80%. We do not expect to see a significant growth of vacancies in both classes: it will be 14–15% for class A and 7.5%-8.0% for class B by the end of the year. Asking rates for class A properties will see a downward correction, reaching RUB 25,500–25,600 per sq m per year (net of operating expenses and VAT); rates for class B properties will remain at the current level, RUB 17,500–17,600 per sq m per year (net of operating expenses and VAT). Business development in 2022 34 thsd sq m of area was leased out in 2022 19.8 m sq m 339 m sq m Class А Class B Class B- Industry overview for 2022 124 125 SISTEMA PJSFC Annual report 2022 sistema.com Results of key assets Attractive segments for Business Nedvizhimost's development are flexible workspaces, traditional build-to-suit projects and joint ventures that enable it to get rent flow and part of revenue, without operating a non-core business. According to JLL, flexible office formats will take up to 30% of the office market in Europe by 2030. The segment of flexible office spaces in Russia is expected to grow at the rate of 22% per year. Rental rates for flexible workspaces are higher than those for traditional offices (RUB 35,000 per sq m per year vs RUB 25,000 per sq m). Business Nedvizhimost plans to capture up to 30% of the flexible office space market in Moscow and become its leader. At present, rental rates are falling due to geopolitical events and many international companies leaving the market. Withdrawal of some tenants from class A offices may increase demand in cheaper classes B and C. Business Nedvizhimost plans to find tenants for its flexible workspaces Officeless to improve revenue from premium locations, but does not intend to further expand the project at the current stage. An additional focus will be on renewing the portfolio to enter new markets, including acquisition of street retail properties and looking for opportunities for redevelopment of plots and properties included in comprehensive redevelopment plans. Financial results, RUB m 2022 2021 Change,% Revenue 4,078 4,164 (2.1) Operating income 1,217 473 157.2 OIBDA 1,540 1,001 53.8 Net income attributable to Sistema 150 (355) – In 2022, the growth of OIBDA was impacted by sale of the Karacharovo warehouse. Asset structure by region, thsd sq m Indicator 2022 2021 Change,% Area of commercial properties in Moscow 335 371 (9.7) Area of commercial properties in St Petersburg 26 26 – Total 361 397 (9.1) The decrease in the area of commercial properties in Moscow came from sale of the Karacharovo warehouse (37,000 sq m). Operating and investment development strategy Financial performance in 2022 30 of the Moscow market to be taken by flexible offices % thsd sq m 361 total area of commercial properties + 53.8% OIBDA growth in 2022 127 Results of key assets 126 SISTEMA PJSFC Annual report 2022 sistema.com Бизнес модель Авто Hotels Customer services Technologies Training Sistema's effective stake cosmosgroup.ru/en Business model Cosmos Hotel Group manages a portfolio of 32 hotels in 19 cities of Russia and abroad, with a total of about 9,000 rooms. Cosmos Hotel Group is one of the largest hotel companies in Russia. guests in Cosmos hotels in 2022 1.4 m > under management¹ rooms under management¹ 32 9 hotels thsd Average ADR of Cosmos Hotel Group hotels Average occupancy rate of Cosmos Hotel Group hotels 4,546 57 RUB % Ownership Management Franchise Consulting services Restaurants Events Health and wellness Travel Booking platform Hospitality School Cloud PMS In-room entertainment Cosmos Hotel Group operates its own hotels and manages third-party hotels. The company is developing at a high pace by entering into hotel management contracts with third parties and developing new hotels under own brands. The company has expertise in managing existing hotels and creating new ones, and acts as a single centre of excellence (it has competences in marketing, sales, procurement, HR, IT and accounting). 1 The data includes the ten hotels acquired in March 2023. 129 Results of key assets 128 SISTEMA PJSFC Annual report 2022 sistema.com 2018 2017 25,292 28,074 28,302 27,328 28,979 30,636 2019 2020 2021 2022 Growth 3.9% 2018 2017 884,279 975,645 992,601 977,409 1,027,010 1,078,361 2019 2020 2021 2022 Growth 4.0% 884279 975645 992601 977409 1,02701e+06 1,07836e+06 2018 2017 485.2 566.3 599.6 376.5 599.3 683.5 2019 2020 2021 2022 Growth 7.1% Industry overview for 2022 Number of hotels and other accommodation facilities in Russia, pcs Sources: Rosstat, Federal Tourism Agency, Market Economics Centre The total number of available hotel rooms increased by 5% in 2022, reaching 1.08m rooms. The average annual growth rate of available rooms in hotels and other accommodation facilities in Russia (CAGR 2017–2022) was +4%. Over the last six years, the total number of available hotel rooms increased by approximately 25%. Number of rooms in hotels and other accommodation facilities in Russia, pcs Sources: Rosstat, Federal Tourism Agency, Market Economics Centre The total revenues of hotels in 2022 amounted to almost RUB 0.7tn. The average annual growth rate of revenues in the Russian hotel industry over the last six years (CAGR 2017–2022) was +7.1%. In the period from 2017 to 2022, total revenues in the industry rose by 41%. The hospitality sector was boosted by the growing demand for domestic tourism and governmental initiatives Revenues of hotels and other accommodation facilities in Russia, RUB bn Sources: Rosstat, Federal Tourism Agency, Market Economics Centre In 2022, city hotels accounted for about 58% of all accommodation facilities (net of unclassified accommodation). Hotels also accounted for about 53% of total available rooms. Hotel accommodation in Russia in 2022 by type, % of total facilities and available rooms 58 53 13 13 8 6 2 18 13 8 7 1 Sources: Rosstat, Federal Tourism Agency, Market Economics Centre Domestic tourism is actively developing in Russia. Over 11 months of 2022, the tourist traffic in Russia was 133.4m people, of whom more than a half stayed in accommodation facilities overnight. In total, hotels and other accommodation facilities received 74.8m guests in 2022, a 12.4% increase from 2021 and a 21.5% increase from 2017. Over the last six years, the average occupancy of hotels and other accommodation facilities grew by 4% a year (CAGR 2017–2022). At the same time, Russian citizens accounted for 96% of the total number of guests amid the growing popularity of domestic tourism. In 2022, the hospitality industry showed a high level of resilience and adaptability to sudden fluctuations in demand, putting to good use the experience it had acquired during the COVID-19 pandemic in 2019-2020. In 2022, the Russian hospitality market saw a considerable increase in the number of hotels and other types of accommodation and in the number of total available rooms. According to preliminary estimates, the number of hotels and other accommodation facilities exceeded 30,000 in 2022, a 5.7% increase from the previous year. The average annual growth rate of accommodation facilities over the last six years (CAGR 2017–2022) was 3.9%. In 2017-2022, the total number of hotels and other accommodation facilities in Russia increased by approximately 20% Hotels Health retreats Countryside hotels, tourist camps Hostels Serviced apartments Motels In 2022, the Russian hospitality market saw a considerable increase in the number of hotels and other types of accommodation and in the number of total available rooms. At the same time, the events of the start of 2022 had a significant impact on the situation in the hospitality sector: six international hotel operators left the Russian market, leading to either a change or a loss of brand by many hotels. aimed at supporting hospitality businesses: in July 2022 the government introduced a five-year zero VAT tax rate for hotel services. Given that the main expenses of hotels are payroll-related, and that the amount of VAT liabilities is considerable, this initiative became a major contributor to market growth. 130 131 SISTEMA PJSFC Annual report 2022 sistema.com Results of key assets In January 2022, Cosmos Hotel Group launched a project for the construction of a multifunctional 5-star natural resort under the Cosmos Collection brand on the eastern coast of the Lake Baikal as part of the special economic zone Baikal Haven. The project is aimed at developing tourism on the Lake Baikal and enhancing the region's attractiveness as one of Russia's key destinations for local and foreign tourists. In June 2022, Cosmos Hotel Group started managing a new 3-star Cosmos Smart hotel in Kogalym, a tourist centre of the Khanty-Mansi Autonomous Area – Yugra. The hotel offers its guests 123 comfortable modern rooms, a restaurant for 110 people, a lobby bar and two conference rooms. The hotel's total capacity is 273 guests. In August 2022, the company opened its first proprietary hotel in Segezha (the Republic of Karelia) under the Cosmos Smart 3 brand. The hotel was built jointly with Segezha Group (both companies are part of Sistema Group). The 60-room hotel is the first hotel in Segezha offering services of international quality. In 2022, the company completed the rebranding of own hotels: Marriott Courtyard Paveletskaya was renamed as Cosmos 4 and was transferred under the management of Cosmos Hotel Group, while Holiday Inn Express Paveletskaya and Holiday Inn Express Voronezh started operating under the Cosmos Smart 3 brand. All hotels owned by Cosmos Hotel Group in Russia are now working under the parent brand. In March 2023, Cosmos North-West LLC, a wholly-owned subsidiary of the Corporation’s subsidiary Cosmos Hotel Group, acquired a 100% stake in a number of Russian companies – owners of ten hotels in four Russian cities –for EUR 200m. As a result of the transaction, Cosmos Hotel Group added the following hotels to its portfolio: six hotels in St Petersburg (Park Inn by Radisson Pribaltiyskaya, Park Inn by Radisson Pulkovskaya, Park Inn by Radisson Nevsky, Radisson Blu Royal Hotel, Park Inn by Radisson Pulkovo, Olympia Garden Hotel), two in Moscow (Park Inn by Radisson Sheremetyevo, Radisson Blu Sheremetyevo Airport), one in Murmansk (Park Inn by Radisson Murmansk) and one in Yekaterinburg (Park Inn by Radisson Yekaterinburg). Altogether, the hotels have 4,078 rooms and a total floor space of 264,100 square metres. In 2021, the hotels’ revenue totalled RUB 4.3bn; in 2019, prior to the pandemic, it was RUB 6.2bn. The total net debt of the acquired companies is negative. Most of the acquired hotels can boast a unique location, being close to the historical centre of St Petersburg and other cities or Russia's largest airports, Sheremetyevo and Pulkovo. The acquisition of these international quality hotels will enable Cosmos Hotel Group to double the number of available rooms and to significantly strengthen the company's position in the Russian hospitality market. In 2023, the company expects its total number of available rooms to exceed 9,500 as a result of the transaction and following the implementation of its development programme. Strategic goals Cosmos Hotel Group's strategy is aimed at becoming a leader in the Russian hotel market by brand strength and recognition and maintaining its leadership in terms of the number of available rooms with prospects for transformation into a public hotel company. The priorities of the company's strategy include: Developing Cosmos Hotel Group's umbrella brand and a well-functioning system of subbrands Plans for 2023: Opening own hotel Cosmos Omsk 4 Launching the construction of Cosmos Collection Baikal 5* Actively expanding the total number of rooms under own brands by implementing own projects, taking over the management of third-party hotels, pursuing M&A deals Increasing operational efficiency, standardising business processes (booking, sales, marketing, training, service and quality, procurement), introducing a cluster-based approach to hotel management in regions Ensuring digitalisation and automation of all the main stages of interaction with the customer and of internal business processes Migrating from a process- centred to a customer- centered model Business development in 2022 Increasing the number of own hotel rooms through M&A deals, integrating new hotels into the company's existing structure Attracting third-party hotels for management Developing the hospitality training programme (hospitality school) for employees: launching a digital platform and introducing training at the workplace 133 Results of key assets 132 SISTEMA PJSFC Annual report 2022 sistema. com 2022 2021 Change,% Total rooms available, thsd 4.6 4.6 – • Hotels in Russia 4.5 4.5 – • Hotels abroad 0.1 0.1 – Occupancy rate, % 56.8 51.1 5.7 p.p. • Hotels in Russia 57.2 52.2 5.0 p.p. • Hotels abroad 47.7 22.5 25.2 p.p. ADR, RUB 4,546 4,302 5.7 • Hotels in Russia 3,89 0 3,667 6.1 • Hotels abroad 24,023 42,119 (43.0) RevPAR, RUB 2,582 2,197 17.5 • Hotels in Russia 2,224 1,913 16.2 • Hotels abroad 11,457 9,458 21.1 The average occupancy rate of Cosmos Hotel Group in 2022 was 56.8%, up by 5.7 p.p. from 2021. The hotel chain's average ADR improved compared to 2021 and totalled RUB 4,546, the main growth factors being the introduction of VAT relief measures and general improvement of performance in the Russian hospitality sector. Due to these factors, the average revenue per available room (RevPAR) rose by 17.5% across the Group. Operating results Financial results, RUB m 2022 2021 Change,% Revenue 5,278 4,013 31.5 OIBDA 941 318 196.0 Operating income (loss) 119 (369) – Net loss (129) (614) – In 2022, the financial performance of Cosmos Hotel Group's hotels continued improving. In 2022, the company's revenue rose by 31.5% year-on-year and amounted to RUB 5.3 bn, as demand was redistributed from outbound to domestic tourism. OIBDА increased more than three-fold, up to RUB 0.9bn, on the back of a partial recovery of tourist flows and growing demand for holiday accommodation, as well as improvement of operational efficiency. Financial performance in 2022 + 31.5 % revenue growth in 2022 135 Results of key assets 134 SISTEMA PJSFC Annual report 2022 sistema.com sitronics.com Sitronics Group is a vertically integrated IT holding company offering a broad range of digital transformation solutions for B2B and B2G customers. Russian IT companies in 2021 according to RAEX rating agency 2 0 1 IT suppliers for the industrial sector in 2021 according to CNews Analytics 1 3 TOP TOP employees 2 > implemented projects 5 Sistema's effective stake > thsd thsd regions of operations 11 qty partners for hardware and software 4 00 IT services Comprehensive Smart City projects Manufacturing of information, computer and telecom (ICT) equipment Manufacturing of electric vessels Development of electric vehicle charging infrastructure Business model Sitronics Group uses a business model that is typical for the industry and employs traditional tools for communicating its value proposition to end customers, including implementation consulting, system integration, installation and maintenance of hardware and software, development and implementation of complex projects. Industries Technologies Competences Software development and implementation Design and implementation of computer complexes Data storage systems System integration, support, IT outsourcing Information security Design and construction of communication networks Design and construction of data centers Oil and gas industry Telecommunications Retail Timber industry Transport and logistic Banks and insurance companies Machine engineering Healthcare Constructions Computer vision Infrastructure for electric vehicles Big Data Industrial Internet of Things In-house production of server hardware > 1 Source: News.ru 2 Source: Raex 137 Results of key assets 136 SISTEMA PJSFC Annual report 2022 sistema.com +13% (0.2%) +2.4% 3,877 bn 2020 194,200 517,834 696,990 1,071,281 1,396,334 212,376 783,462 722,181 1,244,746 1,422,506 4,385 bn 2022 189,506 732,030 807,580 1,207,966 1,459,483 4,397 bn 2021 +3% +2.5% +11% +7% +12% 213,853 856,023 685,633 1,312,588 1,423,367 4,492 bn 2023 +5.5% +0.1% (5%) +9% +0.7% +13% +4.5% +16% +41% -2.4% 2020 2019 1,456 938 304 214 1,227 375 267 1,486 419 296 890 334 227 1,869 2,201 1,451 2021 2022 +31% +23% +25% +21% (40%) (23%) +12% (20%) +11% +18% (34%) +28% Industry overview for 2022 Global IT market, USD m Sources: Gartner, 3D News, Mercury Research and The Wall Street Journal The structure of the global ICT market in 2022: “Communications Services” (32%), “IT Services” (28%), “Devices” (17%), “Software” (18%) and “Data Centre Systems” (5%). The shares of “Communications Services” and “Devices” continue to decrease in favour of “Software”, which indicates, among other things, the growing demand for cloud services. Russian IT market The Russian IT market accounts for 0.6% to 2% of the global market depending on the category. According to preliminary estimates by IDC, it decreased in 2022 by at least 25% in RUB and 34% in USD. Given government support for the industry and the relative success of import substitution for software, the segments of software and IT services may actually decline less than projected. As for hardware, however, the year-on-year decline could be around 50%. However, given the blocked public access to economic data of some major market players and the Federal Customs Service, the real size of the market in 2022 may be hard to assess. In the long run, investments in R&D aimed at creating next- generation inventions and technologies ready to be embedded in the future technological wave of ground-breaking microelectronics solutions will pay off. 1 IT services include system integration, advisory services, custom software development, hardware and software installation and support, and IT training. Russian IT market, RUB bn Source: IDC Global IT market The Gartner estimates that the global ICT market declined in 2022 by 0.2% year-on-year to USD 4.385bn. The main contributors to the negative change were the segments of “Communications Services” (-2.5% year-on-year) and “Devices” (-11% year-on-year). At the same time, the “Software” segment grew by 9% vs 2021 to USD 783.5bn (for reference: the segment grew by 41% year- on-year in 2021). The “Data Centre Systems” segment grew by 12% year-on-year to USD 212.4bn. The global ICT market in 2022 was impacted by a deteriorating global economic environment and a slowdown following a surge in demand during the pandemic and post-pandemic periods. There are indications that the 2022 annual reports of the global ICT market leaders, to be published in mid-2023, will be markedly worse than what investors have become accustomed to. Against this backdrop, there are reports about significant layoffs at the world's largest IT companies. The global ICT market in 2023 will be impacted by the continued fall in demand for processors and flash memory, as well as PCs/laptops and peripherals. Software IT Services Hardware Data Centre Systems Software Devices IT Services 1 Communications Services 138 139 SISTEMA PJSFC Annual report 2022 sistema.com Results of key assets Strategic goals Strategic focus areas: ▪ Developing electric water transport and reformatting the regional passenger transport market ▪ Developing a portfolio of proprietary products for industrial and urban digitalisation ▪ Accelerating growth of Sitronics Group by entering new segments of the IT market and expanding the product range Financial performance in 2022 Financial results, RUB m 2022 2021 Change,% Revenue 32,281 29,247 10.4 OIBDA 3,221 2,478 30.0 Operating income 2,173 1,290 68.5 Net income attributable to Sistema 963 709 35.8 In 2022, Sitronics Group's revenue grew by 10.4% year- on-year to RUB 32.3bn amid growing sanctions pressure on the Group's markets. OIBDA reached RUB 3.2bn in 2022, up 30.0% year-on-year. Net income increased by 35.8% due to optimisation of selling, general and administrative expenses. + 10.4 % revenue growth in 2022 In 2022, Sitronics Group's previously approved development strategy was updated to reflect new challenges and risks associated with the changing geopolitical and economic environment. The long-term strategy envisages transformation of Sitronics Group from a niche integrator into a provider of a broad range of products and services in high-potential markets, including on the basis of proprietary solutions. 141 Results of key assets 140 SISTEMA PJSFC Annual report 2022 sistema.com 142 143 Corporate governance SISTEMA PJSFC Annual report 2022 sistema.com CORPORATE GOVERNANCE 144 Corporate governance system 160 Remuneration policy applied to board members and senior management 162 Risk management system 1 The text of the Corporate Governance Code recommended by letter of the Bank of Russia No 06–52/2463 dated 10 April 2014 is available at https://www.cbr.ru/statichtml/ file/59420/inf_apr_1014.pdf. The conformity of Sistema’s corporate governance practices with the standards set out in the Code is analysed in Annex 1 to this report. Corporate governance system Corporate governance principles Sistema’s corporate governance structure as of 31 December 2022 Professionalism of the Board of Directors and its active involvement in strategic planning and the management and oversight of business processes Special focus of the Board of Directors on related-party transactions and potential conflicts of interest Sistema’s corporate governance principles Sistema is guided by these principles in all of its activities, including strategic and financial management, HR policy, reporting, control and audit, and risk management. In its corporate governance practices Sistema abides by applicable legislation, the Listing Rules of Moscow Exchange and the recommendations of the Russian Corporate Governance Code 1 . Sistema’s Charter and internal regulations A crucial element of the strategy of Sistema as an investment company is maintaining a high level of corporate governance and information transparency. The Corporation aims to meet the best international standards in these areas and consistently enhances its corporate governance practices. 01 04 02 05 03 Clear and effective procedures for taking investment decisions Reasonable transparency of management processes taking into account external circumstances A dividend policy that takes into account both reasonable expectations of investors and Sistema’s financial resources CEO Management Board Chairman Company Secretary Internal Audit Department Chief Auditor Board of Directors Senior Managing Partners Managing Partners Finance Function Governance bodies of the Corporation: ▪ General meeting of shareholders ▪ Board of Directors ▪ President ▪ Management Board Vice President for Corporate Governance and Legal Affairs Managing Director for Protocol Corporate Communications Department GR Department Vice President for Finance Corporate Governance and Legal Affairs Vice President for HR HR Department Protocol Service Vice President for Security Security Department Vice President for IT IT Department Head of Administrative Department Administrative Department Vice President for Strategy and Development Strategy and Development Function Executive Vice President for PR Executive Vice President for GR define its corporate governance principles and procedures, as well as the composition, procedures and powers of its governance and control bodies. The Corporate Governance Code and the Ethics Code of Sistema set out additional commitments of the Corporation, its top management and employees in terms of transparency and ethical conduct of business. 144 145 SISTEMA PJSFC Annual report 2022 sistema.com Corporate governance The General Meeting of shareholders is the supreme governing body of the Corporation. The activities and powers of the Annual General Meeting of shareholders (hereinafter also, “AGM”) are governed by the laws of the Russian Federation, the provisions of Sistema’s Charter and the Terms of Reference of the General Meeting of shareholders. The Corporation seeks to create the most favourable conditions for its shareholders to participate in General Meetings. 1 If an extraordinary General Meeting of shareholders is conducted and its agenda contains an item on the election of the Board of Directors, shareholders who own a sufficient number of shares are also entitled to nominate candidates to the Board of Directors. Such proposals should be submitted to the Corporation no later than 30 days prior to such General Meeting. 2 The notice of the AGM and ballots are also sent by mail to shareholders whose rights to the shares of the Corporation are recorded in the shareholder register. Observance of shareholders’ rights Proposing agenda items for AGM and nominating candidates to the Corporation’s governance bodies Shareholders who own at least 2% of the Corporation’s voting shares are entitled to propose items for the agenda of the AGM and nominate candidates for election to the Corporation’s Board of Directors. Such proposals, including any attachments thereto, should be submitted to the Corporation no later than 100 days after the end of the reporting year, in accordance with the Terms of Reference of the General Meeting of shareholders and other internal regulations of the Corporation 1 . Candidates nominated by shareholders to the Board of Directors of the Corporation are provisionally reviewed by the Nomination, Remuneration and Corporate Governance Committee of the Board of Directors. Participation in AGM and voting on agenda items Sistema aims to ensure maximum protection of the right of shareholders to take part in the governance of the Corporation by participating in the AGM, voting on agenda items and receiving income in the form of dividends. To ensure that shareholders can exercise their right to take part in the AGM, the Corporation actively uses electronic means of communication. All materials relating to the AGM agenda items are published on the Corporation’s website in Russian and in English (www.sistema.ru / www.sistema.com) at least 30 days before the date of the meeting and are then sent to nominee shareholders in electronic form 2 . Sistema’s shareholders may use the e-voting option available on the website of the Corporation’s registrar, JSC Reyestr. To use this service, shareholders should contact the office General Meeting of shareholders Annual General Meeting of shareholders Date 12 August 2022 Form of the meeting Absentee voting Items reviewed and decisions taken ▪ Annual report and financial statements for FY 2021 were approved. ▪ The meeting decided not to pay dividends for 2021. ▪ A new Board of Directors was elected. ▪ Auditors were appointed for RAS and IFRS audits for 2022. ▪ A new version of the Policy on Remuneration and Compensations for Members of the Board of Directors of Sistema PJSFC was approved. Attended Shareholders that held a total of 67.2% of votes Date and reference number of the minutes 15 August 2022, No 3–22 Information about General Meetings of shareholders in 2022 Extraordinary General Meeting of shareholders Date 19 May 2022 Form of the meeting Absentee voting Items reviewed and decisions taken ▪ The meeting determined the number of Board members: nine. Attended Shareholders that held a total of 70.1% of votes Date and reference number of the minutes 20 May 2022, No 1–22 Extraordinary General Meeting of shareholders Date 9 July 2022 Form of the meeting Absentee voting Items reviewed and decisions taken ▪ The meeting terminated the powers of the previous Board of Directors. ▪ A new Board of Directors was elected Attended Shareholders that held a total of 67.8% of votes Date and reference number of the minutes 11 July 2022, No 2–22 of JSC Reyestr for access to their personal shareholder accounts on the registrar’s website. If a shareholder has a personal account on the e-government portal, they may get access to the service without applying to the registrar. More detailed information on the procedure for connecting to the e-voting service is available on the website of the Corporation’s registrar at http://www.aoreestr.ru/ shareholders/e-voting. Each shareholder is also entitled to vote on agenda items either in person or through a representative (if the AGM is held as an in-person meeting of shareholders). The shareholders whose title to the shares is recorded in the shareholder register may complete ballot papers and send them to Sistema by mail ahead of the AGM. The results of voting on the agenda items of General Meetings of shareholders held as in-person meetings are announced before the meeting is closed. After the minutes of the meeting are drafted, shareholders may also view the voting results on the Corporation’s website. Dividends The Corporation announces the amount of dividends recommended by the Board of Directors and the record date in advance to give shareholders an opportunity to make informed decisions with respect to disposing of their shares. When deciding on recommended dividends for 2021, the Board of Directors took into account the remaining market volatility and the need to prioritise the Corporation’s financial stability and sufficient liquidity and recommended that the Annual General Meeting not distribute dividends for 2021. 146 147 SISTEMA PJSFC Annual report 2022 sistema.com Corporate governance Board of Directors Sistema’s Board of Directors as of 31 December 2022, % Independent directors Executive directors Non-executive directors Meetings of the Board of Directors Sistema’s Board meetings are held on a regular basis in accordance with the annual work plan, which is made based on Sistema’s strategic planning and reporting cycle. 2022 2021 Number of in-person meetings 12 8 Number of absentee votes 6 8 Number of items according to the Board's work plan 50 36 Actual number of items reviewed by the Board 50 73 1 Sistema’s development strategy and investment policy 2 Potential investment projects 3 Management of and value creation for Sistema’s investments in portfolio assets operating in various industries; 4 Sistema’s results and performance against budget 5 Budget planning, approval of the consolidated budget of Sistema and key performance indicators of the management 6 Management of the Corporation’s risks 7 Work of the Internal Audit Department 8 HR matters and employee incentive systems 9 Assessment of the quality of corporate governance 10 ESG strategy of the Corporation 11 Mandatory corporate procedures, including convening of the Annual General Meeting of shareholders and developing of the work plan of the Board of Directors 12 Composition of Board Committees and determining the status of Board members 13 Approval of transactions, including acquisition of equity stakes in various companies Composition of the Board The Board of Directors effective as of 31 December 2022 was elected at the AGM held on 12 August 2022. Independent directors account for 56% of the Board members. Under Sistema’s Charter, the responsibilities of the Board of Directors include: The Board of Directors considered the following key items in the reporting period: ▪ Supervising the operations of the Corporation in general. ▪ Formulating strategic and financial development plans. ▪ Determining investment principles and criteria. ▪ Assessing management’s performance. ▪ Defining corporate governance principles. ▪ Approving transactions and strategic projects in accordance with applicable legislation and the Corporation’s internal regulations. Number of Board members 9 22 56 22 In 2022, 18 meetings of the Board of Directors were held. Given external challenges that emerged in the reporting year, the Board of Directors had to significantly adjust its initial work plan. The Board specifically focused on the resilience and stability of the corporate governance system; 16 agenda items out of the 50 reviewed in the reporting year were devoted to this topic. Meetings of the Board of Directors The Board of Directors is a collective governance body in charge of the oversight and strategic management of the Corporation. 148 149 SISTEMA PJSFC Annual report 2022 sistema.com Corporate governance Preparation for meetings and quorum of the Board of Directors Main focus areas Score in 2022 Previous score Membership and structure of the Board of Directors Number of Board members 4.25 4.57 Balance of knowledge, skills and industry experience of Board members 4.38 4.13 Organisation of the Board’s work Content of the Board's agendas 4.50 4.25 Quality and timely provision of materials 4.34 4.38 Quality of discussions at Board meetings 4.50 4.33 Functional areas of the Board's work Strategic management 4.30 4.30 Finance and internal control 4.44 4.20 HR policy and corporate governance 4.21 4.20 The resulting total score was 4.36 on a 5-point scale. Succession planning with view to form a professional Board was identified as an area for improvement. Items reviewed by the Board of Directors in 2022 by topic, % Items reviewed by the Board of Directors in 2022, by topic Assessment of the performance of the Board of Directors and its Committees Assessment of the Board of Directors’ performance is an important tool that helps to identify areas where the work of the Board of Directors may be improved. Sistema continues the practice of annual comprehensive assessments of the work of the Board of Directors and all of its Committees. 4.36 The resulting total score of the Board of Directors points 06 08 12 08 10 14 10 23 6 5 16 5 3 4 7 4 6 9 18 2 4 8 3 32 Business strategy Appointments and HR policy Corporate governance and securities Approval of transactions Approval of internal documents Participation in portfolio companies, groups and associations; branches Financial statements, planning and audit Functional strategies 0 5 10 15 25 20 Business strategy Participation in portfolio companies, groups and associations; branches Financial statements, planning and audit Appointments and HR policy Approval of internal documents Approval of transactions Corporate governance and securities Functional strategies The existing procedures of preparation for Board meetings are designed to ensure the best use of the experience and expertise of Board members. Materials on the agenda items are published on the Board’s electronic portal in advance, which gives directors sufficient time to form an informed opinion on all agenda items. Most agenda items (including the approval of transactions) undergo a mandatory preliminary review at meetings of the Board’s Committees. 150 151 SISTEMA PJSFC Annual report 2022 sistema.com Corporate governance In 2022, the Committee held Sistema has three committees of the Board of Directors: 01 02 03 Strategy and Sustainability Committee; Audit, Finance and Risk Committee Nomination, Remuneration and Corporate Governance Committee. Committees of the Board of Directors Key functions of the Committee Strategy Committee ▪ Discussion and analysis of strategic matters of Sistema Group management and control over the strategic planning cycle ▪ Preliminary consideration of M&A transactions and major investment projects ▪ Assistance in the formation and implementation of the Corporation’s strategy in the area of sustainable development Audit, Finance and Risk Committee ▪ Assisting with the process of preparation and audit of the Corporation’s financial reports and supervising it ▪ Facilitating interactions with the Corporation’s external auditors ▪ Facilitating the evolution of the Corporation’s risk management and internal control systems ▪ Facilitating budgeting and financial modelling ▪ Facilitating the evolution of the internal audit function ▪ Facilitating compliance with ethical standards and regulatory requirements ▪ Facilitating the design, development and implementation of the Corporation’s investor relations strategy, including its dividend policy ▪ Appraisal of related party transactions and major transactions Composition of Sistema’s Board Committees as of 31 December 2021, % Strategy Committee In 2022, the Committee held meetings meetings meetings Audit, Finance and Risk Committee Nomination, Remuneration and Corporate Governance Committee 1 In 2022, the Committee held In 2022, the Board of Directors optimised the work of Board Committees taking into account the available resources and tasks. The functions of the former Ethics and Control Committee and the Sustainability and Investor Relations Committee were distributed between the three other committees. This structure of the Board Committees fully ensures comprehensive review of items submitted for the Board and is in line with best corporate governance practices. Key functions of the Committee Nomination, Remuneration and Corporate Governance Committee ▪ Facilitating the development of an effective corporate governance system meeting high standards at the Corporation and its portfolio companies ▪ Conducting a preliminary review of candidates: – for the Board of Directors of Sistema – for the boards of directors of portfolio companies – for senior management positions across Sistema Group – for the position of the Corporation’s Corporate Secretary ▪ Developing the Corporation’s incentive and remuneration policies ▪ Organising assessment of the Board’s performance Functions of the Board Committees ▶ ▶ 1 The President of Sistema PJSFC attends Committee meetings in the capacity of a permanent invitee and does not vote on matters submitted for consideration of the Committee. 6 10 13 40 25 20 40 75 80 20 Independent directors Executive directors Non-executive directors The main role of the Committees is to assist the Board in the preparation and adoption of decisions in specific functional areas, as well as to ensure prior in-depth scrutiny of matters put forward for the Board’s consideration. The status, procedures for nominating members, responsibilities and decision-making procedures of the Board’s Committees are regulated by the terms of reference of the relevant committees as approved by the Board of Directors and published on the Corporation’s website in the Corporate Documents section at https:// sistema.com/about/corpmanage/docs. 152 153 SISTEMA PJSFC Annual report 2022 sistema.com Corporate governance as well as in industries where Sistema already has a presence. The Expert Council is tasked with verification of the conformity of the projects with a series of formal requirements set out in the Corporation’s regulatory documents, the scoring of projects, and the preparation of written opinions thereon. Once approved by the Expert Council, projects are submitted to the Finance and Investment Committee. The Budget Subcommittee consists of four members and aims to improve budgeting policies, principles and procedures and to develop guidelines in this area for the governance bodies of the Corporation. The Remuneration Subcommittee consists of seven members and aims to improve policies, principles and procedures related to HR management and to develop guidelines in this area for the governance bodies of the Corporation. Risk Committee The Risk Committee’s responsibilities include: ▪ Assessment of the most material risks facing the Corporation and its portfolio companies. ▪ Ensuring the preparation of a risk register and a generalised risk map of Sistema. ▪ Preparation and approval of risk assessment reviews. ▪ Development of proposals regarding acceptable risk levels (risk appetite) for Sistema. ▪ Coordination of risk management strategies and plans and monitoring of their implementation. ▪ As of 31 December 2022, the Committee consisted of 13 members. The Committee is chaired by the Vice President for Finance. In 2022, the Risk Committee held five meetings. The Risk Committee has an Expert Group consisting of eight members that reviews matters pertaining to the approval of counterparty limits (applying to banks, insurers and management companies) and guarantees (including bank guarantees) securing counterparty obligations and other operational matters pertaining to risk management across Sistema Group. Tender Committee The responsibilities of the Tender Committee include: ▪ Ensuring the acquisition of goods, works and services on the best terms available ▪ Minimising the costs of purchase (ownership, operation) of goods, works and services without compromising their quality ▪ Ensuring the sale of Sistema’s property and rights as they become irrelevant to the company’s operations on the best economic terms available ▪ Ensuring the transparency of procurement procedures and impartial decision-making ▪ Facilitating the prevention of corruption, fraud and other wrongdoing in procurement ▪ The Committee consists of eight members and is chaired by the Vice President for Finance. In 2022, the Tender Committee held 22 meetings. President To improve its managerial decision-making processes Sistema has established a number of governance bodies that report to the President and the Management Board, namely, the Finance and Investment Committee, the Risk Committee, the Tender Committee. These committees are permanent consultative collective bodies tasked with a detailed analysis of current affairs and processes within their remit and with assisting the President and the Management Board in decision-making. Finance and Investment Committee The responsibilities of the Finance and Investment Committee include: ▪ Review of the Corporation’s investment projects at different stages from conception to completion ▪ Approval of the financial model, business plan and hurdle rate for each investment project ▪ Making recommendations regarding viability of projects, exit scenarios, and sources of financing ▪ Review of external financing terms The Committee considers the Corporation’s investment projects once they are approved by the Expert Council. The Committee’s approval is required for further review of the project by the Board of Directors. As of 31 December 2022, the Committee consisted of 12 members. The Corporation’s President is the chair of the Committee. In 2022, the Committee held 43 meetings. The Finance and Investment Committee oversees the work of the Expert Council, the Budget Subcommittee and the Remuneration Subcommittee. The Expert Council consists of 12 members and considers all of the Corporation’s new investment ideas and projects for acquisition of assets in new and adjacent industries, Governance bodies reporting to the President and the Management Board Management Board The President of Sistema is a permanent chief executive officer whose main tasks include managing the current operations of the Corporation and dealing with matters outside the remit of the AGM, the Board of Directors and the Management Board, with the aim of achieving the strategic goals set by the Board of Directors, ensuring the Corporation’s profitability and safeguarding the rights and legitimate interests of its shareholders. The President reports to the Board of Directors and the Annual General Meeting of shareholders of Sistema PJSFC. The President chairs the Management Board of Sistema. The Management Board of Sistema PJSFC determines methods for the implementation of the Corporation’s development strategy, formulates development plans, determines and monitors investment processes and previews strategic matters to be subsequently submitted to the Corporation’s Board of Directors. In 2022, the Management Board held 7 meetings and reviewed 17 agenda items in the following key areas: ▪ Development strategy, value creation and monetisation of Sistema’s investments in various industries ▪ Risk management ▪ Financial planning and control ▪ ESG strategy of Sistema ▪ Review of various deals The Board of Directors approved the composition of the Management Board in May 2020. As of 31 December 2022, the Corporation’s Management Board consisted of 12 members. 43 held by the Finance and Investment Committee meetings meetings meetings 5 held by the Risk Committee 22 held by the Tender Committee 154 155 SISTEMA PJSFC Annual report 2022 sistema.com Corporate governance Features of the risk management, internal control and internal audit system Risk management Sistema’s risk management system employs a two-level approach, under which the risks identified at Sistema and its portfolio companies are consolidated to assess their impact on Sistema Group as a whole. The enterprise risk management system (ERM) used by the Corporation addresses the following tasks: ▪ Identification of risks at all levels of management (from the top to line management), which includes identifying risk owners and making risk passports. ▪ Primary assessment of the materiality of identified risks and their analysis (VaR methodology). ▪ Ranging risks by management levels. ▪ Assessment of the aggregate influence of material risks on the Corporation’s key financial indicators (Monte Carlo modelling). ▪ Development of plans to mitigate identified risks at all management levels. ▪ Regular monitoring of performance against mitigation plans and assessment of their effectiveness. ▪ Risk monitoring, quarterly reports on risks facing the Corporation. Sistema’s risk management procedures are carried out by risk owners with the support of professionals from the Risk Management Department. The reassessment of identified and/or new risks, the effects of mitigation and response measures and the approval of limits applying to counterparties (banks, management companies and insurers) are reviewed at least on a quarterly basis by a special Expert Group of the Risk Committee, which includes representatives of the Corporation’s key departments. The risk management system is monitored by Sistema’s Risk Committee and Management Board. Sistema’s senior executives make regular reports on risk management at the Corporation to the Audit, Finance and Risk Committee, which translate into further reports to the Board of Directors. Internal control system Sistema’s internal control system is based on advanced international and Russian internal control practices and methodologies, covers all the material decision-making levels and serves the best interests of the Corporation’s shareholders, investors and management. The internal control system and the responsibility for implementation of control procedures are formalised in codes, policies, procedures and other internal regulations of the Corporation. The Internal Control Policy was approved by the Corporation’s Board of Directors and is an internal top-level document describing the key principles of internal control as a continuous and integrated process that involves all units and governance bodies of the Corporation. The Corporation methodically works on the development of a regulatory framework designed to govern all matters relating to internal control by means of cascading them from the level of the Board of Directors to the level of employees. The key objectives of the internal control system are: ▪ Creating new and improving existing control mechanisms that will ensure efficient business processes and the implementation of the Corporation’s investment projects. ▪ Ensuring the safety of the Corporation’s assets and efficient use of its resources. ▪ Protecting the interests of the Corporation’s shareholders and preventing and resolving conflicts of interest. ▪ Creating conditions for timely preparation and submission of reliable reports and other information that is legally required to be publicly disclosed. ▪ Ensuring the Corporation’s compliance with applicable laws and requirements of regulators. In accordance with advanced practices and approaches in internal control and audit, the effectiveness of the Corporation’s internal control system is ensured at three levels (in addition to the Board of Directors and senior management). Level 1. Heads and employees of the Corporation’s subdivisions are responsible for building an effective internal control system and assessing and managing risks within their remit. Level 2. Sistema’s controlling bodies and Committees perform control functions, e.g.: ▪ The Risk Committee and the risk management function are responsible for developing and monitoring the implementation of effective risk management practices. ▪ The Finance and Investment Committee of the Corporation approves and monitors the implementation of investment projects. ▪ The Security Department is in charge of comprehensive security at the Corporation, including economic security, prevention of corruption and information security. Level 3. The Internal Audit Department, which conducts independent assessments of the effectiveness of the internal control system, the risk management procedures, and the corporate governance system. The Corporation’s internal control system includes, among other things, the following: ▪ Regulation of processes and procedures. ▪ Division of roles and responsibilities in decision-making. ▪ Prevention and identification of control mechanisms. ▪ Notification about irregularities, abuse of office, conflicts of interest. ▪ Ethical standards of business conduct. ▪ Awareness of the Corporation’s employees about the internal control system. All of the Corporation’s employees as persons in charge of control procedures bear responsibility for the effectiveness of such controls and risk management activities as prescribed in their job descriptions, internal regulations and legislation of the Russian Federation and other applicable jurisdictions. Internal audit The Internal Audit Department reports to the Board of Directors (functionally) and Sistema’s President (administratively). The Department is headed by a Chief Audit Executive who is appointed and dismissed by the President based on the resolutions passed by the Corporation’s Board of Directors following a preliminary approval by the Board’s Audit, Finance and Risk Committee. The key objectives of the Internal Audit Department are: ▪ To assist with increasing the effectiveness of the internal control, corporate governance and risk management systems of the Corporation and to give recommendations on their improvement to the governance bodies, the relevant committee, the subdivisions and employees of the Corporation. ▪ To coordinate its activities with the external auditor of the Corporation and other persons providing assurance to the Corporation. ▪ To provide consultations to the divisions and employees of the Corporation. To meet these objectives, the Internal Audit Department carries out the following: ▪ Provides assurance (audits) by objectively analysing available audit evidence aiming at independent evaluation of the risk management, internal control and corporate governance processes. The contents and scope of the audit assignment for providing assurance are determined by the customer and the Internal Audit Department. ▪ Assesses the reliability and effectiveness of the internal control system and gives recommendations on improving it to the governance bodies, the relevant committee, the divisions and employees of the Corporation. ▪ Assesses the level of corporate governance at the Corporation and gives recommendations on improving it to the governance bodies, the relevant committee, the divisions and employees of the Corporation. ▪ Assesses the reliability and effectiveness of the risk management system of the Company and gives recommendations on improving it to the governance 156 157 SISTEMA PJSFC Annual report 2022 sistema.com Corporate governance Assessment of the Board of Directors’ performance After many directors resigned from the Board in spring 2022, the Board for some time was not authorised to make decisions pertaining to strategic matters and approval of transactions, but this problem was successfully resolved in July 2022, when a new Board was elected. The Board acquired a lot of new members, but the existing corporate governance system ensured succession in the work of the Board and management of the Corporation. Moreover, the Board and Board Committees still meet the requirements of the Listing Rules of the Moscow Exchange pertaining to the number and share of independent directors. In 2022, nine members were elected to the Corporation’s Board of Directors, five of which qualified as independent directors according to the Listing Rules of the Moscow Exchange and the Russian Corporate Governance Code. All of the Corporation’s independent directors have broad recognition in the professional community and vast experience in managing large organisations, which ensures the objectivity of their judgements and independence from the influence of the Corporation’s management and shareholders when making decisions. In July 2022, the work of the Board Committees was optimised taking into account available resources and tasks. The functions of the Ethics and Control Committee and the Sustainability and Investor Relations Committee were distributed between the three other committees. This structure of the Board Committees fully ensures comprehensive review of items submitted for the Board and is in line with best corporate government practices. Drawing from the experience of 2022 and the results of self- assessment the Board of Directors formalised the principles and approaches that were already used by the Corporation for ensuring the succession of Board members by approving a relevant policy in December 2022. Development of the corporate governance system in 2022 01 02 Revision and update of the Corporation’s regulations on information turnover (incl. insider information) taking into account actual and potential changes in the regulatory framework (before the end of 2023). Development of the Group’s approaches to responsible investment, including recommendations for the Corporation’s employees that sit on boards of directors of portfolio companies on key ESG aspects and risks, and organising events for exchange of experience on sustainable development between the Group companies (throughout 2023). Plans for development of corporate governance The Nomination, Remuneration and Corporate Governance Committee of Sistema’s Board of Directors annually develops and approves the Corporation’s action plan for improving corporate governance in the next year and later adjusts it as necessary. The plan for 2023, which was developed taking into account the results of the external assessment of the Board of Directors, among other things, envisages the following steps: 1 In January 2023, the task of administering the Hotline was transferred to Sistema’s Security Department. bodies, the relevant committee, the divisions and employees of the Corporation. ▪ Provides consultations to the divisions and employees of the Corporation. The contents, scope and format of consultations shall be determined by the Chief Audit Executive of the Corporation after consultations with the divisions and/or employees of the Corporation that initiated (requested) the consultations. ▪ Provides consultations to the governance bodies, divisions and employees of the Corporation on ensuring effective functioning of the Single Whistleblowing Hotline. Performs selective audits of messages received on the Single Hotline at the discretion of the Chief Audit Executive and subject to availability of the required competences at the Internal Audit Department 1 . ▪ Regularly meets with the external auditor of the Corporation and other persons providing assurance to the Corporation. The Internal Audit Department has all the resources and powers required to perform the above functions and is an independent structural unit. In its work, the Department is guided by applicable laws of the Russian Federation, International Professional Standards of Internal Audit, the Code of Ethics of the Institute of Internal Auditors and the Corporation’s Charter and other internal regulations. The Internal Audit Department closely interacts with Sistema’s independent auditors, helping them to better coordinate their work and providing consultations to ensure better annual audit planning with respect to evaluation of the effectiveness of the internal control system in the area of financial reporting, and assessing the identified risks. Regular reports on the performance of the Internal Audit Department are reviewed by the Audit, Finance and Risk Committee of the Board of Directors and are also submitted for consideration by the Board of Directors. In 2022, the Internal Audit Department conducted 28 audits to assess the effectiveness of the Corporation’s internal control, risk management and corporate governance systems. The audits performed by the Internal Audit Department did not uncover any weaknesses or risks that could affect the sustainability of the Corporation’s business as a whole. Specific comments pertaining to various aspects audited were communicated to stakeholders in a timely manner and followed up by recommendations on how to eliminate them. Sistema’s Internal Audit Department actively develops automation technologies in an effort to improve the effectiveness of audit procedures. External audit In compliance with the decision of the Audit, Finance and Risk Committee, the Corporation uses the following procedures to appoint independent auditors of Sistema’s financial statements. The Committee performs annual assessment of the quality of audit services received. If the quality of services provided by the current auditor is deemed unsatisfactory, the Audit, Finance and Risk Committee organises a tender for engaging a new auditor. If the quality is deemed satisfactory, Sistema negotiates the price of the services with the current auditor for the following period. Resolution of conflicts of interest Matters related to conflicts of interest are governed by the Corporation’s Code of Ethics as well as the laws of applicable jurisdictions. The Corporation has an ethics assessment procedure: all top managers complete Ethics and Conflict of Interest Declarations annually or as conflicts of interests arise. Moreover, all new employees are introduced to the requirements of the Code of Ethics and the procedure for completion of Declarations and are required to report relevant conflicts of interest (if any) before starting to perform their responsibilities. In 2022, the results of the ethics declaration campaign were reviewed by the Audit, Finance and Risk Committee of Sistema’s Board of Directors. In most cases, the declared conflicts of interest did not require any resolution measures, as they posed no risks to the Corporation’s interests. However, action plans on conflict resolution were implemented with respect to several declarants in accordance with best corporate governance practices. 158 159 SISTEMA PJSFC Annual report 2022 sistema.com Corporate governance 2022 2021 Remuneration for work as member of the Board of Directors 150,702,700 390,957,500 Salaries 4, 5 28,358,700 398,492,500 Bonuses 5 91,000,000 351,123,200 Remuneration for work as member of the Board Committees 5,191,500 9,380,000 Reimbursement of expenses incurred by Board members in connection with their duties 175,700 824,200 Remuneration paid to Sistema’s Board members and senior management 1 2022 2021 Payroll 3 608,120,600 988,800,200 Bonuses 3,707,352,200 3,982,281,800 Other types of remuneration 265,600 6,870,000 The short-term incentive scheme for the top managers of Sistema PJSFC in 2022 consisted of: ▪ A fixed monthly salary determined in line with the internal system of job categories (grades). ▪ Bonuses paid for implementation of projects, generation of cash income, achievement of KPIs and set objectives. Remuneration is paid based on employees’ individual performance and positive cashflow generated by projects implemented by the teams of Managing Partners and Departments of Sistema. Payments may amount to а) up to 20% of cash income from implemented projects, b) fixed percentage of annual income for achievement of KPIs. For the purpose of calculating bonuses, cash income means generated value of an asset (in the event of sale or IPO) less a) a hurdle rate determined by the Finance and Investment Committee chaired by the President of the Corporation prior to the start of a project or acquisition of an asset; b) investments made in such an asset and project costs; c) selling and administrative expenses of the corporate centre, including payroll. Other terms and conditions No extra compensation above the level stipulated by labour laws of the Russian Federation is paid to the President or other senior executives in case of termination of employment. Sistema does not pay remuneration to executive management for serving on the Management Board. The Corporation does not provide loans to senior executives. Remuneration policy applied to Sistema’s senior management Remuneration paid to Sistema’s Management Board members 2 , RUB Remuneration and compensation paid to Sistema’s Board members, RUB 1 All figures in this section are given before the applicable income tax. 2 Including Sistema’s President and other executive members of the Board of Directors. 3 This amount includes holiday pay and severance pay. 4 Remuneration in the form of salaries and bonuses is the compensation allocated in the reporting period to the non-executive directors sitting on the Board of Directors. 5 This amount includes holiday pay and severance pay. Remuneration policy applied to board members and senior management Remuneration policy applied to Sistema’s Board members 1 For an increase in capitalisation to be recorded for the purposes of the Policy, the weighted average price of one ordinary share of Sistema on the Moscow Exchange at the end of the reporting year (for 60 preceding trading days) had to exceed the weighted average price of one share at the beginning of the reporting year (for 60 preceding trading days). 2 0.1% or 0.125% (depending on tax residency) of the increase in capitalisation for the financial year. Remuneration for the work of members of the Board of Directors is calculated and paid in accordance with the Policy on Remuneration and Compensations Payable to Members of the Board of Directors of Sistema PJSFC (hereinafter, “the Policy”) approved by the General Meeting of shareholders. Two versions of the Policy were in force during the reporting year: ▪ The version approved by the General Meeting of shareholders on 29 June 2019 (in force during corporate year 2021/2022). ▪ The version approved by the General Meeting of shareholders on 12 August 2022 (in force during corporate year 2022/2023). Key differences between the two versions are described below. Basic remuneration of members of the Board of Directors During the reporting year, the basic remuneration of Board members equalled: ▪ In case of remuneration paid for corporate year 2021/2022, RUB 13.7m or RUB 17.8m, depending on whether a Board member had the status of Russian tax resident. ▪ In case of remuneration paid for corporate year 2022/2023, RUB 13.7m regardless of whether a member had the status of Russian tax resident. Basic remuneration was paid to Board members in cash in equal quarterly instalments. Additional remuneration of members of the Board of Directors In accordance with the Policy in effect during corporate year 2021/2022, additional remuneration in the form of Sistema’s ordinary shares was paid to members of the Board of Directors subject to capitalisation growth in the reporting year 1 . The amount of additional remuneration was set as a variable equal to a share of the increase in capitalisation for the financial year 2 and in any case was limited by the amount of basic remuneration (i.e. could not exceed RUB 17.8m). According to the new version of the Policy, the General Meeting of shareholders may pass a decision on payment of additional remuneration to members of the Board of Directors. The Nomination, Remuneration and Corporate Governance Committee shall in this case issue a recommendation regarding the amount and form of payment of any such additional remuneration. Remuneration for performance of additional duties According to the version in effect in corporate year 2021/2022, members of the Board of Directors performing additional duties, i.e., the Chair of the Board, Deputy Chair of the Board and Chairs of Board Committees, received remuneration in the amount stipulated by the Policy on a quarterly basis. According to the new version of the Policy, only the Chair of the Board receives remuneration in the amount stipulated by the Policy on a quarterly basis. Reimbursement of expenses and other conditions Members of the Board of Directors are reimbursed for their expenses associated with performance of their duties, including participation in the meetings of the Board of Directors and Board Committees. Sistema insures the liability of members of the Board of Directors. Sistema does not provide loans to members of the Board of Directors. 160 161 SISTEMA PJSFC Annual report 2022 sistema.com Corporate governance Sistema’s risks are the manifestations of processes and factors that Sistema has little or no influence on. That said, it is within the Corporation’s power to take steps to reduce the negative consequences of such factors should they materialise. This makes efficient assessment of the existing risks and the probability of their occurrence, as well as effective risk management, an important part of Sistema’s strategy. Being an integral part of Sistema’s every business process, risk management is built into strategy planning and implementation, investing, budgeting, procurement and everyday operations. Sistema’s integrated risk management system relies on international standards, recommendations and best practices in risk management. Integrated risk management aims to reasonably guarantee the achievement of strategic goals and contain risk within limits that Sistema’s management and shareholders deem acceptable. Sistema has in place an Integrated Risk Management Policy. The purpose of integrated risk management is to build and maintain an efficient system for: ▪ Identification and systematic analysis of the Sistema’s risks. ▪ Mandatory risk analysis accompanying managerial decisions. ▪ Distribution of responsibilities for risk management. ▪ Preparation of careful response/mitigation plans and the control of their implementation. ▪ Monitoring of risks and the efficiency of risk management. ▪ Preparation of risk management reports for various collective bodies within Sistema and for other stakeholders. ▪ Accumulation of knowledge on integrated risk management. Risk management officers across the Group regularly update the top risks of their respective businesses and the Group as a whole and analyse their potential effect on financial performance, which involves the use of financial models and simulation methods. To address the risks so identified, risk owners develop risk mitigation and response plans, conduct risk monitoring and update action plans as necessary. Sistema uses the following methods of risk management: 1 Risk avoidance means refraining from particular actions or foregoing particular assets fraught with high risk. Risk avoidance is used in exceptional cases where the cost of treating a particular risk would be too high, such treatment action would not reasonably result in its satisfactory mitigation, and transferring such risk to a third party would be impossible or impractical. 2 Risk reduction means controlling and preventing a risk while owning it and influencing it in a proactive manner. Mitigation steps aim to bring the probability of a particular risk event and/or the potential damage it can cause down to a level that is deemed acceptable according to Sistema’s risk appetite. Mitigation is the priority risk management method at Sistema PJSFC. 3 Risk acceptance means assuming a risk without exerting any influence on it. This method is used when the associated risk level is acceptable to Sistema or when influencing the risk would be impossible or economically impractical. 4 Risk transference means handing a risk over to a third party where modifying it within Sistema would be impossible or economically impractical and its monetary value is greater than the limit deemed acceptable to the Corporation. Risk transference may take the forms of insurance, hedging, outsourcing, etc. For Sistema, insurance is an inextricable part of risk management. Insurance is fully integrated in the corporate risk management toolkit and protects the financial interests of Sistema and its shareholders against unforeseen losses Risk management system Integrated risk management system and the Group’s risk appetite 3 rd line of defence 1 st line of defence 2 nd line of defence Functional reporting Board of Directors Management Board/President of the Corporation Audit, Finance and Risk Committee Managing Partners Functions and Departments Risk management Internal control Compliance Internal Audit Department 163 Corporate governance 162 SISTEMA PJSFC Annual report 2022 sistema.com that may arise in the course of business processes, whether as a result of external effects or otherwise. Sistema has in place a comprehensive insurance programme that covers a wide spectrum of operational risks and is reviewed on an annual basis. This includes various types of compulsory and optional third-party insurance, motor insurance, property insurance, health insurance for employees, and accident insurance. Such insurance contracts are signed with Russia’s largest insurers selected in open tender processes where insurer reliability is the key criterion. One of the key principles of risk management at Sistema Group is the use of the risk appetite concept. This approach involves the identification and monitoring of the Corporation’s target risk profile in light of current strategic goals and their integration into risk management procedures. Sistema Group’s risk appetite determines the level of risk acceptable to its shareholders and involves the following fundamental principles: ▪ The amount of potential losses arising from risks accepted by Sistema Group may not reach a level where it would lead to a complete termination of the Group’s operations, whether in case of any crisis or otherwise. ▪ The structure of cash flows of Sistema Group companies should guarantee the timely fulfilment of obligations to counterparties in the short and long term. ▪ The Group at all times aims to avoid the concentration of risks in specific counterparties, industries, and countries/ regions associated with high risk. ▪ Sustainable development and long-term economic efficiency. ▪ Compliance with the requirements of national regulators wherever Group companies operate and with the standards and recommendations of international regulatory bodies. ▪ Impeccable business reputation and avoidance of any action potentially damaging to such business reputation. Risk management reports are submitted for review to the relevant collective governance bodies of the Corporation at least once a quarter. Each such report contains a relevant assessment of risks and their impact on the Corporation’s financial performance, the effectiveness of risk mitigation and response plans, and potential risk areas (areas requiring attention) identified for future periods. The Corporation has built a unified compliance system that involves a comprehensive mitigation programme including anti- corruption and stock exchange rules, the protection of personal data and confidential information, and steps against money laundering and terrorism financing. Financial risks Sistema’s business is inextricably bound with the global economy and financial markets. In particular, it is sensitive to movements in the prices of oil, gas and other commodities exported by Russia. A weakening or strengthening of the rouble against the US dollar and the euro amid fluctuating oil prices and imposed sanctions may result in a rise in costs and/or a drop in revenues or impede the achievement of financial targets and the repayment of debt by Sistema Group companies. An outflow of foreign investment from Russia under the pressure of sanctions and restrictions applying to the business of foreign companies may adversely affect the joint ventures (partnerships) and new investment projects of Sistema Group. Growing inflation may result in higher expenses and therefore put downward pressure on profit margins and also affect domestic demand for the products and services of Sistema Group companies. Servicing and refinancing the Corporation’s current and future financial liabilities might require a significant outflow of cash. If sanctions persist in the medium term Global and country risks Risks related to changes in the political and economic situation in Russia are material for Sistema because most of the Group’s business is conducted in Russia. The companies and investment funds of Sistema Group also operate in the CIS, South and Southeast Asia. Many products of the Group’s companies are exported to the CIS, Southeast Asia and North Africa. In the event of any major political turmoil in these regions, the Group’s local business may be disrupted or discontinued, which may lead to material losses. Political and economic instability, as well as any potential downturn or slowdown in Russia’s economic growth, may lead to a decrease in household incomes and consumer demand, which could be damaging to the performance and financial standing of the entire Group. The business of the Group may be adversely influenced by a toughening of sanctions, a complete economic blockade and change in the political situation in the country, as well as potential involvement of the Russian Federation in military conflicts. Due to the situation in Ukraine, Western countries and supranational unions of states imposed sanctions on a number of Russian citizens and companies. In particular, in April 2022 and April 2023, respectively, the UK Government imposed asset freeze sanctions and certain other sanctions on two shareholders of Sistema, Vladimir Evtushenkov and Felix Evtushenkov. Sanctions might conceivably be extended to, or complemented by, additional sanctions categories that would apply to specific companies or individuals within the Group. Any breach of any sanctions imposed on the Group may prevent the companies of the Group from cooperating with the government authorities of the US/EU/UK, result in civil or criminal penalties being applied to the sanctioned persons or Industry risks Sistema is faced with diverse risks associated with the presence of Sistema’s portfolio companies in various sectors of the economy. The most material risks are related to the Group’s operations in the telecom, electric power, retail (including e-commerce), banking, high tech, hospitality, healthcare, pharmaceuticals, timber, agricultural and real estate industries. Any significant change in these industries may have a material negative impact on the financial standing of Sistema’s portfolio companies and on the Group as a whole. Sistema’s external risks and the access of the Russian banks and businesses to foreign debt remains restricted, market liquidity deficit will grow along with interest rates, inhibiting the acquisition of funding both for the operations and for debt refinancing across the Group. An inability to raise the required funding on such terms and in such time as required may lead to substantial restrictions on business development, operations and investments. Unfavourable macroeconomic environments in many countries where Sistema has businesses may make it necessary to re-evaluate goodwill for some of the Company’s assets. Foreign currency controls and restrictions on capital repatriation may adversely affect capital flows and reduce the value of Sistema’s investments in Russia, which in turn may have a significant negative impact on the business of Sistema Group. A potential bankruptcy of one of the Russian banks acting as the Group’s counterparty may reduce the availability of borrowing funds and lead to Sistema losing money deposited with such bank. their personnel in accordance with the laws of the US/EU/UK, or lead to significant fines being imposed on the companies of the Group along with potential damage to their reputation. Any further tension between Russia and other countries and any escalation of existing conflicts, introduction of additional sanctions, or continued uncertainty as to their scope may adversely impact the national economy, the financial status of the Group’s partners and suppliers, and the capability of the Group’s companies to conduct trading and financial operations and to secure funding on commercially viable terms, and may increase the volatility of stocks of Sistema and particular companies of the Group. The introduction of sanctions against Russia or Russian companies and individuals may cause disruptions in international payment systems, which in turn may make it impossible for companies across the Group to settle accounts, damaging Sistema’s investment appeal as a result. 164 165 SISTEMA PJSFC Annual report 2022 sistema.com Corporate governance Social and environmental risks Due to the wide variety of industries where the companies of Sistema Group operate, social and environmental risks faced by the assets differ materially across the Group. However, a number of major trends currently observed may be seen both as risks and opportunities for such companies: ▪ Change in consumer sentiment, with people increasingly opting for sustainable consumption and healthy living, and growing expectations as regards brand missions, corporate responsibility, and business sustainability. ▪ Changing population age structure making it necessary to adjust and update products and services to best meet the needs of the ageing national population. ▪ Increased competition for talents due to a demographic decline and changing job expectations of the young workforce. ▪ Climate change and extreme weather conditions that may impact crop yields, people’s health, and the operation of infrastructure. ▪ New technological solutions and economic transformation, including digitalisation and automation in the manufacturing and service sectors conducive to workforce displacement. ▪ Growing cyber security threats and tightening regulations in confidentiality and personal data protection. ▪ Deteriorating living standards and potential rise in social tensions in specific regions where the Group operates eroding profits of the Corporation and companies across the Group. ▪ Tightening regulations in sustainable development, carbon control, and information disclosure. Among material risks faced by the Group’s industrial companies are environmental, occupational health and safety and waste disposal risks, as well as risks related to infrastructure health, shutdowns and electromagnetic safety, which are critical for telecommunications and power grid companies. In the agricultural sector, the most material risks include climate risks and challenges related to the need to adapt to changing weather conditions, greenhouse gases, water consumption and animal farming. Emergencies and accidents at production facilities across Sistema Group may have significant environmental effects, including land and water pollution, excessive atmospheric discharges, effluent disposals and hazardous spills, potentially harmful for local communities, ecosystems and biodiversity. Any irrational use of natural resources (such as land and forests) may deplete raw materials and lower the economic performance of agricultural and forest assets. To manage these risks the companies of the Group implement advanced technological solutions, enhance management systems in environmental protection, energy efficiency, occupational health and safety, and develop measures to prevent and mitigate accidents and emergencies. Risks related to non-compliance with the principles of sustainable development in supply chains may result in disruptions in supply chains and hurt Sistema Group’s reputation. As part of their efforts to minimise such risks, companies across the Group impose strict requirements on suppliers, contractors and partners as regards compliance with law and internal regulations. With global and local terrorism threats rising, potential attack incidents across the Group’s enterprises and infrastructure facilities may cause material economic damage, harm human health and lives, and provoke a regulatory tightening on data access requirements. Legal risks A risk of unpredictable court rulings and administrative decisions being passed with respect to the business of Sistema and its portfolio companies may adversely affect the Group’s operations. This risk stems from numerous factors, including: ▪ Possible discrepancies and ambiguities in: (i) federal and other laws; (ii) bylaws issued by the executive authorities of the states where Sistema Group operates; (iii) regional and local laws, rules and regulations. ▪ Gaps in legislation and lack of court and administrative guidelines on the interpretation of some laws, as well as conflicts between certain court guidelines and rulings. ▪ Influence of political, social and commercial factors on the judicial system. ▪ Potential selective or discretionary actions of government authorities. Gaps in Russia’s existing corporate and securities legislation may create barriers to securing funds in the future. A lack of clarity on the applicability of the Federal Law «On Procedures for Foreign Investment in Business Entities of Strategic Importance for National Defence and State Security» and the regulations of the Customs Union of the Eurasian Economic Union to Sistema Group may have a negative impact on the business of Sistema Group due to its having foreign shareholders. There is also a risk of amendments being made to the laws of the countries where Sistema Group companies operate, due to potential change in the laws and regulations governing international trade and investments that may be introduced by foreign states or international organisations. Since Russian corporate law makes shareholders liable for the obligations of their controlled companies, Sistema may incur financial losses related to the liabilities of its portfolio companies. The minority shareholders of Sistema’s subsidiaries may contest or vote against related-party or other transactions, which may limit Sistema’s capabilities of closing investment deals and restructuring businesses. Should the Russian Federal Anti-Monopoly Service conclude that Sistema or one of its material subsidiaries has violated any of the existing anti-monopoly laws, the relevant business will be subject to serious administrative sanctions, entailing losses for the Corporation. The Federal Anti- Monopoly Service may also prevent the Corporation and its portfolio companies from closing and/or performing certain transactions, which may also limit Sistema’s capacity to conclude investment deals and restructure businesses. Tax risks Tax laws, regulations and practices of the jurisdictions where Sistema’s assets operate are often intricate, opaque and prone to frequent modifications and ambiguous interpretations. Should any action of the Corporation or its portfolio company be interpreted as a breach of tax law, the Group’s business may be significantly injured. Russian transfer pricing law may make it necessary to introduce adjustments to pricing practices used at Sistema Group’s companies and entail additional tax liability in light of certain transactions. In 2015, Russia adopted new rules relating to the taxation of undistributed profits of controlled foreign companies and profits from indirect property sale in Russia, the concept of a beneficiary owner, and new criteria to be used to establish tax residency of foreign legal entities in Russia. These rules have already undergone several revisions since they were first introduced, with new amendments having retroactive effect. The new taxation rules may result in more tax liability for the Group due to uncertainty of legal interpretation and a lack of relevant legal precedents. Risks related to stock markets Geopolitical tensions, sanctions imposed against certain Russian companies, a worsening macroeconomic environment and an outflow of capital and investors from the Russian market affect the value of Russian businesses. Sistema Group’s access to investor funding through stock markets may therefore be restricted further as a result of the introduction of sectoral sanctions in industries where the companies of Sistema Group operate and/or due to the investors growing increasingly wary of Russian companies in general. In particular, Sistema’s ability to raise funding via debt instruments may be limited, which is likely 166 167 SISTEMA PJSFC Annual report 2022 sistema.com Corporate governance Risks related to Sistema Group’s operations Implementation of business strategy The Corporation’s strategy aims to develop a balanced and diversified asset portfolio in sectors and regions where Sistema has expertise and competitive advantages, while attracting leading international and Russian partners. Despite having a well-formulated strategy, Sistema cannot guarantee the achievement of its goals, the efficient management of its portfolio companies or benefits from new investment opportunities for a number of reasons, including high leverage and limited funds available for investment. Sistema’s failure to achieve its strategic goals may damage its financial performance. The development of Sistema Group companies depends on numerous factors, including the receipt of necessary permits from state authorities, sufficient demand from consumers, successful development of technologies, efficient risk and cost management and timing of R&D completion and market launches of new products and services. Difficulties arising in any of these areas may have a detrimental effect on the development of Sistema Group companies and the Corporation’s financial results.. Acquisition, integration, disposal or restructuring of assets Sistema implements its strategy via acquisitions, disposals and restructuring of assets. New investment opportunities come with various risks, including failure to find relevant targets or their not being available for acquisition, failure to conduct sufficient or appropriate due diligence of the target company’s operations and/or financial situation, and potential overvaluation of/overpayment for assets. These risks can also affect Sistema’s financial performance. The acquisition of assets may increase pressure on the Corporation’s cash position and make it necessary to obtain external funding. Delays in the implementation of investment deals or failure to close them may hamper the achievement of Sistema’s strategic goals and negatively influence the Corporation’s results, financial position and investment appeal. Sistema may struggle with building an efficient system for managing and controlling new assets. The top risks in this area include: ▪ Inability to efficiently integrate the operating assets and personnel of the acquired company. ▪ Inability to establish and integrate necessary control mechanisms, including those related to logistics and distribution. ▪ Conflicts between shareholders. ▪ Hostility and/or unwillingness to cooperate on the part of the management and personnel of the acquired asset. ▪ Loss of customers after the acquisition. If any of the above risks materialise, the relevant asset may lose part of its value and/or worsen Sistema’s financial performance. When disposing of its assets the Corporation may face the following risks: ▪ Delays in closing or failure to close a deal due to inability to obtain corporate or governmental approvals. ▪ Valuation errors. ▪ Assuming excessive obligations towards the buyer. ▪ Loss of synergies with other assets within the portfolio. If one or several of such risks materialise, the Corporation may lose some of its potential profit and thus see poorer financial performance. Management and key personnel The implementation of Sistema’s strategy to a large degree depends on the effort and professionalism of its management team. Failure to hire a sufficiently competent and motivated management team may jeopardise Sistema’s business, performance, financial position and development prospects. Cash flows from Sistema Group companies The Corporation’s financial performance depends on the ability of Sistema Group companies to generate cash flows needed to service its financial liabilities, including the repayment of debt and interest, and to make other investment activities in the future. Such cash-generation capacity may be constrained due to regulatory, tax or any other barriers, which may have an adverse effect on the Corporation’s financial position and liquidity. Borrowings Cash flows from portfolio companies may be insufficient to finance all of the Corporation’s investments scheduled for a particular period. This may create a need to obtain additional external funding and increase the debt burden of the Corporation, which, in turn, would put downward pressure on credit ratings across the Group. A downgrading of a credit rating may increase the cost of debt servicing, make new borrowings more expensive or inaccessible and, in some cases, trigger loan acceleration. The risk of deterioration or withdrawal of the Corporation’s credit rating correlates with reputation and liquidity risks. The Corporation’s current debt level also constrains its borrowing capacity. Uncertainty of estimates in reporting In implementing the Company’s accounting policy, management is required to make assumptions, estimates and judgements with respect to the book value of assets and liabilities that cannot be reliably valued on the basis of other sources. The estimates and their underlying assumptions are formed on the basis of previous experience and other factors that are considered relevant in the given circumstances. The actual results may differ from these valuations, which may have a material adverse effect on the Group’s financial performance. Estimates and assumptions are regularly reviewed. Any change in such estimates is recognised in such period in which the estimate is revised if such change influences only this period, or also applies to future periods if such change influences both the current and future periods. Loan covenants Loan and debt securities agreements signed by the Corporation and companies across the Group contain certain restrictive covenants that limit their capacity to borrow further funds, collateralise or sell assets and enter into transactions with affiliates. They may also restrict certain aspects of Sistema’s operations, such as the financing of capital expenses, or limit its capacity to repay debt and service other liabilities. Any breach of covenants, however inadvertent, may entitle the creditors of the Corporation and/ or its portfolio companies to call in on their loans, which poses a threat to the Corporation’s financial performance. to lead to a lack of working capital and cash available for investment and significantly undermine the Corporation’s financial performance. Risks related to delisting In April 2022, Federal Law No 114-FZ “On amending the Federal Law “On joint-stock companies” and other laws of the Russian Federation” came into force. The law requires that Russian issuers stop trading their shares in form of depositary receipts, except for cases when a decision to continue their depositary receipt programme is made following an issuer’s application. The Corporation filed an application with the Russian Finance Ministry and obtained permission to continue trading its depositary receipts outside Russia till 13 May 2023. 168 169 SISTEMA PJSFC Annual report 2022 sistema.com Corporate governance Licences and permits The operations of Sistema Group’s companies are regulated by different government bodies and agencies issuing and renewing licences, approvals, and permits, and also depend on applicable laws, regulations, and standards. Regulating authorities to a large extent rely on their own judgement when interpreting and implementing legal requirements, issuing and extending licences, approvals and permits, and monitoring compliance with such licences. There is no guarantee that the existing licences and permits, including those issued to the Group’s companies, will be extended, that new licences and permits will be issued or that the companies will be able to comply with the terms of such licences. There is no guarantee either that existing or future licences or permits will not be suspended or revoked on some grounds. Any of these circumstances may have material negative consequences for Sistema’s business. Privatised companies The portfolio of Sistema Group contains several privatised assets. In the future, the Corporation or Group companies may also take part in other asset privatisations. Since Russia’s privatisation-related legislation remains somewhat unclear and inconsistent and contradicts other provisions of law (e.g., federal and local privatisation norms are in discrepancy), many of such privatisations can potentially be contested, however selectively, which may have a material negative effect on the business, financial situation, performance, or development prospects of the Corporation. Compliance with applicable laws and regulations In conducting their business, the Corporation and companies across Sistema Group are required to comply with a number of rules and regulations regarding market competition, corporate governance, fraud and corruption prevention, conflict of interest management, compliance with sanctions, fair treatment of customers, prevention of money laundering and terrorism financing, adherence to the information security policy and prevention of illegitimate use of insider information and market manipulations. Any failure to comply with these requirements may create the risk of legal and regulatory sanctions, significant financial losses and reputational damage. Moreover, the activities of Sistema and its portfolio assets are regulated by the anticorruption laws of the jurisdictions where they conduct their business or where their securities are listed. Human rights The Corporation is aware of its responsibility for observing human rights, preventing any exertion of undue influence on human rights, and eliminating or mitigating the potential consequences of such influence should it ever take place. In its activities and dealings with suppliers, contractors, partners and other stakeholders the Corporation may directly or indirectly influence the rights of employees, local communities, customer and consumer. Any instance of human rights violations would adversely affect the Corporation’s reputation and lead to court disputes, loss of investor, customer or employee trust, or backlash from local communities, trade unions and NGOs. Risks associated with human rights are taken into account in the risk management systems of Sistema Group companies, with material items regularly reviewed by the boards of directors of relevant portfolio companies. For more details on the management of human rights risks please refer to Sustainability Management. Digitalisation of business, development of IT and protection of personal data With digitalisation of businesses (implementation of modern IT solutions and systems) and comprehensive penetration of the internet, risks related to cyber security and personal data protection are becoming a major threat to businesses across Sistema Group. Any inability to prevent cyber attacks and unsanctioned access to Sistema’s networks and databases may cause, inter alia, leaks of personal data and confidential information, damage to the assets of the Group’s portfolio companies, disruptions in production processes, network security breaches and costs related to the restoration of IT systems and equipment, which may materially and adversely affect the business of Sistema Group. Risks associated with the protection of personal data are most relevant for assets in telecommunications, online services, finance and e-commerce. Sistema’s portfolio companies implement their own programmes, projects and measures that make it possible to reduce the likelihood and potential negative consequences of their industry-specific risks. Competition All business segments where Sistema operates are exposed to competition from other companies. Telecom, electric power, retail (including e-commerce), hospitality, private healthcare, pharma, banking, high tech, real estate, timber and agricultural markets in Russia and elsewhere are highly competitive. An inability of any company of the Group to compete efficiently may have a material negative effect on the business, performance, financial situation and development prospects of the Corporation. Brand quality and reputation Developing and maintaining brand awareness for the Group’s companies is crucial to shaping the public opinion about their existing and future products and services. Sistema believes that the importance of a company brand is growing steadily in highly competitive markets. Successful development and improvement of brand awareness depends to a great extent on the efficiency of marketing and ability to provide quality products and services at competitive prices. The effort and money invested in brand development may prove greater than the incomes they yield, which means potential financial losses for the Group’s companies. Sistema’s reputation may suffer from any unethical business practices, professional errors, negligence, failure to comply with human rights, dissemination of inside information and any corruption offence, should any of the above take place anywhere within the Group. 170 171 SISTEMA PJSFC Annual report 2022 sistema.com Corporate governance SUSTAINABILITY MANAGEMENT 174 Management system 176 Responsible investment 180 Key ESG areas 188 Social investments and activities 172 173 sistema.com SISTEMA PJSFC Annual report 2022 Sustainability management The key functions of the Strategy and Sustainability Committee, which is chaired by the Chair of the Board of Directors include For more details please visit: https://sistema.com/upload/ iblock/214/0cz3o4162nityp8s4euvrwinpmu5ph7z/ Annex-2.-TERMS-OF-REFERENCE-OF-THE-STRATEGY- AND-SUSTAINABILITY-COMMITTEE-OF-THE-BOARD-OF- DIRECTORS.pdf Other Committees of the Board of Directors consider certain ESG aspects (including corporate governance and ethical business conduct) within their respective mandates. The key principles and approaches of the ESG strategy are consistently cascaded to the Group level through Sistema’s representatives on the boards of respective companies. In 2022, Sistema presented an ESG strategy that had been approved by the Board of Directors. The strategy is aimed at increasing the stability of Sistema’s investment portfolio, strengthening Sistema’s positive influence on social development and decreasing its impact on the environment by means of effective asset management. The Corporation’s ESG strategy is based on the fundamental assumption that high-quality corporate governance, account for social and environmental risks and opportunities increase the long-term value and stability of a business, especially amid high market volatility and economic turbulence. At the new stage, the Corporation’s strategic ESG priorities are still responsible investment and asset management with view to create value for its shareholders and a broad range of stakeholders. The next cycle of implementation of the Corporation’s sustainability strategy envisages break down of approaches to the assessment of ESG profiles of potential investments and portfolio businesses by industry in order to avoid potential risks and identify additional business opportunities related to working on such socially important tasks as inclusion and mobility, healthy lifestyle and healthcare, affordable housing and accessible city infrastructure, clean energy, reduced waste and circular economy, public catering, etc. Sustainable development strategy https://sistema.com/upload/ iblock/049/qcmocrz8ygo9s4xrx8af0wkrjtw9984p/Sistema_ESG- Strategy.pdf Sistema’s guiding corporate responsibility principles For more details please visit: https://sistema.com/upload/ iblock/0b6/0b6ebeabe7c86c5ccb7f3bb96b76c45c.pdf Management system Risk management Employee care Integrity and transparency Focused allocation of financial and intellectual resources on promoting innovation Respect for human rights Respect for the environment Ethics, loyalty and honesty Investment in socially impactful projects and programmes 01 05 02 06 03 07 04 08 supporting the strategy development and transformation of the Corporation’s business processes in line with the sustainability and responsible investment principles; developing recommendations for enhancing the ESG strategy of the Corporation and the Group companies; reviewing the corporate charity strategy. Sistema’s Board of Directors plays a key role in determining the strategic areas of the Corporation’s activities in the area of sustainable development and overseeing its results. In the middle of 2022, Sistema’s Board of Directors approved Terms of Reference of the Strategy and Sustainability Committee of the Board of Directors. The updated Terms of Reference provide for the Committee’s leading role in setting the Corporation’s ESG agenda. 174 175 SISTEMA PJSFC Annual report 2022 sistema.com Sustainability management Responsible investment The responsibility of Sistema as an investor is in the effective management of portfolio assets and funds to build value for shareholders and a wide range of stakeholders in the long term. The Corporation aims to build competitive high-added- value businesses that honour the principles of social and environmental responsibility and contribute to the sustainable development of their respective industries and geographies and to the steady growth of socioeconomic and technological potential, human and natural capital, standards of living, and social well-being. Sistema’s investment process is regulated by internal documents and procedures. Potential investment projects and investment programmes of portfolio companies are subject to detailed examination as part of Sistema’s multi-stage investment process. In addition to financial analysis and industry analysis that underlie decision-making for each project, such components as management quality, staffing, state of production base, infrastructure and technology, related social obligations and environmental risks can also be considered for specific projects. Since 2020, Sistema’s strategic approach to responsible investment has been incorporated into a new set of investment criteria, including ESG factors, that were approved by the Board of Directors and into corporate governance regulations. Sustainable development became an integral element of Sistema’s strategy, carrying weight in all investment decisions and asset management strategies. In 2002, Sistema became a signatory to the UN Global Compact to promote shared values and responsible business practices, and in 2017, to the Social Charter of the Russian Business, a set of fundamental principles of responsible business practices adopted by the Russian Union of Industrialists and Entrepreneurs. Participation in sustainable development initiatives Implementation of principles for responsible investment In 2022, Sistema became one of the founders of the National ESG Alliance to support transition of the Russian economy to sustainable development through partnership and consolidation of efforts of stakeholders for the purpose of preserving the environment and ensuring prosperity of society and long-term business growth. Sistema in ESG ratings and awards 2021 2022 2020 2019 BB B BB BB When exiting investments ▪ Ensuring the independence and reliability of sustainability management systems within the company ▪ Preparing reference notes and guidelines on sustainability When managing assets ▪ Baseline sustainability requirements for portfolio companies and extra requirements when preparing for IPOs ▪ Engagement with portfolio companies via their boards (as per established corporate procedures) to enhance sustainability management and drive ESG performance When building asset portfolio ▪ No «toxic» industries and activities that are forbidden by local law or international standards ▪ Attention to the ESG profile of each company when making investment decisions 2022 low ESG risk 2021 2020 11.5 12.1 15.3 The value of the company has low exposure to the risk of significant financial impact caused by ESG factors. No 1 Best score among Russian companies No 32 out of 900+ companies in the industry group «Diversified Financials» Group A which comprises 18 companies with the highest individual scores in the index index “Responsibility and Transparency” Group B which comprises companies with positive changes in the “Sustainable Development Vector” 176 177 SISTEMA PJSFC Annual report 2022 sistema.com Sustainability management Change Management. Visionaries award. Sistema won the Successful Start nomination of the “Change Management. Visionaries” award for creating a centre of excellence in the area of multistory CLT housing construction in Russia Corporate Charity Rating ESG rating of sustainable corporate governance ESG transparency ranking Sistema is among 12 participants of the 2022 Leaders of Corporate Charity rating Sistema is one of the leaders of corporate ESG practices in Russia Information disclosure by MTS is close to maximum and the highest among telecom companies MTS is a leader in the rating MTS is demonstrating best corporate ESG practices Segezha Group is the leader in the pulp&paper industry Segezha Group is included in the list of companies with best practices Segezha Group has well- developed corporate ESG practices Etalon Group A+ A+ 1.86 A+ A 1.23 A+ B+ 1.16 points points points 1 According to assessment published in December 2021. Management B ESG ranking of public financial companies Corporate Governance Index Survey of the companies’ contribution to the National Projects Sistema received a diploma for the best practices in covering the company’s contribution to the National Projects from the Sustainable Business Development, CSR and Volunteering Council of the Russian Chamber of Industry and Commerce AMONG THE TOP TOP TOP TOP in the general rating of 150+ largest Russian companies Sistema is among the top 3 out of 30 leading Russian banks, financial organisations and insurance companies included in the ESG ranking Sistema is among the leaders of disclosure of corporate governance information included in the MOEX index Sistema and MTS made it to the top 11 of 66 Russian companies that had received a request from investors to disclose information about climate change risks 1 15 3 20 11 178 179 SISTEMA PJSFC Annual report 2022 sistema.com Sustainability management Key ESG areas INVESTMENT STRATEGY Sistema identified three key ESG areas to cultivate through investing, with a view to achieving a meaningful positive impact: The Corporation’s activities are underpinned by developed corporate governance practices and effective cooperation of the Group companies. Key ESG areas Corporate governance and synergies Accessibility and quality Well-being Smart environment ▪ Access to products, services and information ▪ Customer experience ▪ Product stewardship ▪ Human capital ▪ Health and safety ▪ Data privacy and security ▪ Smart homes, cities and industries ▪ Operational eco-efficiency ▪ Energy management and climate change ▪ Business ethics ▪ Human rights and stakeholder engagement ▪ Risk management ▪ Innovation management ▪ Sustainable supply chain smart, efficient and safe environment well-being of employees, customers and local communities accessibility and quality of products and services Innovation and digital transformation are the focus of the Corporation’s strategy. Sistema consistently invests in building intellectual potential: science and education, advanced research, tech startups, new developments and digitalisation. The Corporation cooperates with innovation support institutes, creates its own R&D centres and facilitates the adoption of advanced technologies and organisational innovations at its portfolio companies. Most of the projects implemented by the Corporation, its assets and Sistema Charitable Foundation contribute to solving socially important issues at the intersection of the key ESG areas. 181 Sustainability management 180 sistema.com SISTEMA PJSFC Annual report 2022 Examples of key ESG efforts of portfolio companies Sistema and its portfolio companies contribute significantly to the formation of a competitive labour and procurement market (including the engagement of small and medium-size businesses), the modernisation of infrastructure, industry and agriculture, the enhancement of the accessibility and safety of products and services, the development of the health and education systems and the social and environmental well-being of communities where they operate. Given the vast diversity of sectors Sistema invests in, sustainability risks and the value creation potential vary across the Group. Below we provide some of the most illustrative examples of the efforts portfolio companies made in 2022. Development of services for entrepreneurs information, the platform will generate a set of documents to be filed with the Russian Federal Tax Service that fully meets all regulatory requirements. MTS Your Business also includes a project for supporting small businesses, Know in Person. Participants of the project may receive legal and marketing consultations, help with speaking at industrial conferences and forums and also bonuses from products of MTS Your Business. The service includes an online map showing information about 5,000 entrepreneurs from 41 Russian cities. Expansion in regions of operations In 2022, Sistema signed strategic agreements with four regions of Russia (Astrakhan, Perm, Adygeya and Bashkortostan). These agreements are aimed at promoting a favourable economic and social climate in the regions, making them more attractive for businesses and comfortable for local residents and tourists. The key areas of cooperation are development of industries, telecommunications, healthcare and tourism and construction of housing and infrastructure. The agreement with the Astrakhan region envisages implementation of projects aimed at development of tourist and housing infrastructure, agriculture and healthcare. Sistema and the Astrakhan region also intend to cooperate in the telecom sector by developing projects related to facility management systems, information security monitoring and transport infrastructure. The strategic agreement between Sistema and the government of the Republic of Adygeya envisages cooperation in IT, including digital transformation of the key economic sectors and the social sphere. The agreement on cooperation between Sistema and the Perm region in the development of river tourism and passenger transportation by water transport envisages creation of modern eco-friendly electric water transport and development of the necessary transport and charging infrastructure. Priority areas of cooperation between Sistema and the Republic of Bashkortostan include development of new industrial facilities related to availability of affordable power sources and prompt connection of users to local power grids. As part of development of its international business, Ozon expanded its chain in several countries in 2022. The company opened a sorting centre in Bishkek. It receives, processes, assembles and packages orders. Opening of the sorting centre in the Kyrgyz Republic will help to expand the range of textile and homeware products on the platform. Ozon also opened a logistical centre in Astana. This will enable sellers from Kazakhstan to start selling to the marketplace’s multi-million loyal audience in Russia, will drastically increase the number of local sellers on the platform and help Kazakhstani businesses to reach a broader circle of customers and make deliveries cheaper. Ozon opened a representative office in Istanbul. This is the company’s first foreign office outside the CIS. Employees of the Turkish office will be responsible for attracting sellers and retailers to the platform to expand its product mix. The company plans to focus on Turkish apparel brands. In 2022, Etalon continued its expansion in new regions and started working on new construction projects in Omsk, Yekaterinburg and Tyumen with an aggregate area of over 3m sq m. Simultaneously with housing construction, the company develops social infrastructure in districts under development, building clinics, schools and public spaces. Ozon and the My Business entrepreneurs’ support centre launched a free education programme for entrepreneurs titled «Ozon. Start. Businessmen». First-time entrepreneurs learned how to start selling their products on the marketplace. In addition to practical skills and knowledge about Ozon’s functioning, project participants can receive initial capital for their businesses. The education programme was launched in several regions in a test mode and will later be rolled out across Russia. MTS developed a new service, ID Scan, which offers automated risk monitoring thus helping small and medium- sized businesses to save time on screening counterparties and hiring employees. The service will help entrepreneurs to avoid risks related to fraudulent activities of employees or partners. It also enables employers to update information about employees for a specific period of time, thus providing them with warnings about changes in the balance of risk factors in a real-time mode. Information for the report is collected from 15+ open sources, including state information systems, such as the Unified State Register of Legal Entities, Unified State Register of Individual Entrepreneurs, the Federal Bailiff Service, etc. MTS also launched a number of services for supporting small and medium-sized businesses as part of its online digital project MTS Your Business. It now offers its users free registration of their business. It will take entrepreneurs 15 minutes to prepare a set of documents for registering as an individual entrepreneur or a limited liability company without leaving home. After a user provides the necessary 182 183 SISTEMA PJSFC Annual report 2022 sistema.com Sustainability management Development of healthcare services In 2022, the Alium production facility (part of Binnopharm Group ) increased its output by 25% compared to the previous year, producing 64.5m packs of medications. The facility began producing 13 new drugs, some of which are on the government’s list of vital and essential drugs. In 2022, Sistema BioTech developed 12 innovative natural medications aimed at prevention and correction of a number of common conditions, including diabetes and reproductive function disorder. The new drugs will be launched on the Russian market in the near future. Medsi and the UNIM pathology laboratory signed an agreement on centralisation of cancer diagnostics at the chain’s clinics based on the company’s Digital Pathology software. The clinics received access to Russia’s biggest database of pathologists. The developed software will be used to hold multidisciplinary online consultations with pathologists, surgeons, etc. Medsi had the AI Monitoring and AI Diagnostics systems installed at its clinics. AI Monitoring is a system of uninterrupted analysis of video stream from hospital cameras to prevent such events as a patient’s fall, bed sores, etc. The service was actively used at Medsi’s COVID-19 hospital in Otradnoye. As a result, time of nurses’ response to such events was reduced from hours to a few seconds. Development of human capital Sistema Charitable Foundation (SCF) launched a scholarship programme for young people across Russia as part of its national education project Lift to the Future, which helps school and university students and graduates to develop professional skills. A number of Sistema Group companies took part in the development of the scholarship programme. The goal of the programme is to help school and university students with broadening their knowledge and choosing a career. The budget of the programme is RUB 30m. In 2022, Segezha Group actively worked on its School of Masters project aimed at developing the professional knowledge and leadership skills of line managers at production facilities (foremen and heads of shops and divisions). By the end of 2022, a total of 57 participants received advanced training certificates and began applying new skills to efficiently organise the work of their shops and divisions. The training not only brought new knowledge and competences, but also entailed a solid financial reward: increase of the wage premium to 25% of the fixed salary, to which district and northern premiums are applied. The training sessions, master classes and workshops for development of professional competences, leadership skills and personal efficiency were delivered by invited teachers and experts. Segezha Group continued developing its Idea Factory programme to engage staff in generating ideas about work improvements and lean production. The programme is carried out at all enterprises of Segezha Group in all regions of operations. Each participant aims to find and eliminate a real or potential loss in the production process and can come up with a way to enhance operational efficiency, reduce costs or improve business processes. Segezha Pulp and Paper Mill has achieved the biggest success with the programme. In 2022, its employees registered 188 improvement proposals, 55 ideas were approved for implementation and 32 projects were carried out. MTS launched Russia’s first free online course on data annotation for the first stage of building neural network algorithms for special needs people, including those on the autistic spectrum and with impaired hearing. The best students will be offered internships at MTS AI and NtechLab, which develop AI-based software. The comprehensive online learning course takes three months and includes 22 hours of interactive video lectures and about 28 hours of practice. Enhancement of operating efficiency In 2022, Steppe AgroHolding began using machine vision to assess sunflower crops. The technology uses air photography to calculate the number of plants on a field with an error not exceeding 1%. This enables the company to assess the quality of crop seeds and field works, as well as the efficiency of plant protection used. Computer vision also helps to monitor the development of crops and promptly adjust applied agricultural technologies. As part of Segezha PPM’s environmental programme, Segezha Group replaced lime coolers in all the three lime kilns of the mill’s chemical block. The new coolers will enhance the efficiency of the technological process and ensure the hermetic state of kilns during lime cooling, thus preventing it from getting into discharged air. Thus, the replacement will help to significantly improve the environmental situation in the town of Segezha. LLC Bashkirenergo (a subsidiary of JSC BPGC ) began work to replace outdated oil-filled equipment of substations with modern gas-insulated equipment. This will improve the technical characteristics of the power grid equipment and improve environmental safety, contributing to a favourable environmental situation. Gas-insulated switches are fire-proof, have a small size and weight, are noiseless and have increased switching capacity. 184 185 SISTEMA PJSFC Annual report 2022 sistema.com Sustainability management Restoration and development of natural ecosystems Being one of the country’s largest logging companies, Segezha Group takes reproduction of forest resources in its regions of operation very seriously. Last year, the company carried out reforestation work on about 60,000 ha (compared to 38,600 ha in 2021). The increase in the area of reforestation efforts was due to participation of the company’s new assets in the Irkutsk and Krasnoyarsk regions. Reforestation work is performed on all clear-cut plots after the end of logging and removal of logged timber. In logging areas, effort is made to preserve undergrowth on logging plots and to mineralise the soil surface. Forest crops receive technological and silvicultural care to prevent growth of grass, bush and tree weeds, washaway of soil by moisture, its blowout and squeezing out by frost. At each stage of forest use, the company takes into account the transformation of animal habitats and the state of landscapes that are classified as protective forests. Steppe AgroHolding contributes significantly to reforestation in its regions of operation in the South of Russia. In 2022, the company planted trees in the Stavropol and Rostov regions as part of its large-scale project to improve the environment and preserve soil fertility. The aggregate planted area was about 160 ha, and the cost of this project is estimated at RUB 11.5m. Restoration of wood lines is part of the programme to protect and improve soils, which is included in the company’s Sustainability Strategy till 2030. The Group companies also perform reforestation work as part of volunteer initiatives and campaigns. In 2022, employees of Segezha Group’s Vyatka Plywood Mill participated in the Save Forest campaign in the Kirov region. Volunteers and participants of the enterprise’s youth council planted about a hundred pine saplings on the territory of the Bobinsky forest district in Kirov. In autumn 2022, Segezha Group’s volunteers in the Irkutsk region took part in a volunteer clean-up in Ust-Kut. They cleaned up the territory of a local community centre and planted 60 decorative bushes. Steppe AgroHolding took part in the Day of Tree Planting festival that was organised in the Rostov region in autumn 2022. The company sponsored the event during which Improving quality of life in regions of operations Ozon opened 16,000 new goods acceptance stations for sellers in 2,500 cities and towns of Russia. Now more than 80,000 sellers have a drop-off station within a walking distance from their warehouse. This is especially important for small entrepreneurs from small towns. Ozon’s order pick-up points are managed by franchisees. In 2022, MTS carried out over 100 projects for improvement and upgrade of mobile communications. The operator continued developing its internet network in the urban environment and also provided mobile communications to remote towns and villages in all regions of operation. In 2022, MTS focused on developing in the Central, Caucasian, Southern and Volga federal districts. MTS aggregated all five LTE frequency ranges in use in the Moscow region’s commercial infrastructure, which will provide subscribers with mobile internet at a speed of up to 800 Mbit/s and will enable the operator to use frequencies more efficiently and save up to 20% of its costs. MTS plans to aggregate all local residents could participate in beautification of town parks. About 30,000 trees and bushes were planted during the event. In 2022, Lesosibirsk Woodworking Plant No 1 and Novoyeniseisky Timber and Chemical Plant (both subsidiaries of Segezha Group ) released over 320,000 young sturgeons and graylings in the Yenisey river as part of an ecological programme for reproduction of biological water resources and habitats. In the reporting year, LLC Bashkirenergo (a subsidiary of JSC BPGC ) together with PJSC Bashneft released about 20,000 young sterlets in the Belaya river. This initiative is part of Bashkirenergo’s ESG policy. It was carried out in compliance with the resolution of the Bashkir Natural Resources and Ecology Ministry on allowing use of the Belaya river for the purpose of restoration of biological water resources. available LTE ranges in other regions of Russia, including St Petersburg, the Leningrad region and the Republic of Bashkortostan. Sitronics Electro (part of Sitronics Group) is actively involved in the development of electric charging infrastructure across Russia. In 2022, the company installed charging stations for electric cars in Moscow and the Moscow and Leningrad regions. The stations offer customers to choose between rapid (80% in 15-20 minutes) or slow charging. The company installs charging stations at large shopping malls and public spaces so that a customer can have something to do while his/her car is being charged. The operator’s stations already service electric cars and buses in Moscow, the Moscow region, Nizhny Novgorod, Ulyanovsk, Sochi and Rostov-on- Don. Sitronics Group plans to further expand its chain of charging stations. At the end of 2022, Segezha Group commissioned Russia’s first multistory apartment buildings built from CLT panels. The main construction material used in these buildings is cross laminated timber used to make wall panels and structural floors for residential and non-residential buildings. Thanks to its physical and mechanical properties, CLT has great heat insulation and can stand high pressure, it has high fire and earthquake resistance, high durability and a positive carbon balance. It is used for walls, structural floors, roofing and stair flights. Use of CLT panels as construction blocks significantly reduces the time needed to construct a building, which can be important when dealing with consequences of natural disasters, implementing rehousing programmes for dilapidated housing and as part of renovation and urban environment improvement projects. 186 187 SISTEMA PJSFC Annual report 2022 sistema.com Sustainability management Social investments and activities Sistema Charitable Foundation (SCF or the Foundation) is one of the largest charitable foundations in Russia. It was established in 2004 to manage the social activities and projects of the Group companies. SCF invests in education and professional development, supports cultural and educational projects, and provides social assistance through the creation of a platform for the implementation and promotion of the Corporation’s charitable initiatives. In addition to investments and support of charitable projects, SCF organises various events and campaigns targeting people of various ages and social categories in all regions of Russia. Lift to the Future was recognised as the best corporate project in the social segment of sustainable development At ESG Rethink Forum 2022, the best corporate projects in the area of sustainability were awarded with the national award ESG Awards Russia 2022. Lift to the Future, a flagship educational project of Sistema Charitable Foundation, which is carried out in partnership with the Group companies, won 2nd place in the social category. Lift to the Future was launched in 2020 and attracted about 365,000 participants in just one year. About 80 educational materials were issued, and hundreds of young professionals and students received help with finding internships or first jobs. In 2022, the programme focused mainly on supporting and developing promising young professionals. Over 2,100 students from across the country were selected to participate in the Thinking of the Future online project. Its goal is to teach students basic skills of various types of thinking, which will become the foundation of their career success in the future. Also in 2022, participants of the University Students to School Seniors programme completed the preliminary defence of their projects: a total of 98 project teams presented their case solutions to Sistema Group professionals. At the first stage of the programme, the participants undergo an intensive online course on the basics of project work and project management, work with school children and soft skills. At the second stage, they start guiding school project teams: offering cases from the Group companies and helping to find a solution, present it as a fully-fledged project and defend it in front of experts - representatives of Sistema businesses. Over 240 students passed the selection and became tutors of school teams. The Lift to the Future programme acts as a consolidator of SCF’s key projects, making it possible to create a comprehensive educational and social programme across the regions where the Corporation operates. Lift to the Future educational materials students selected to participate in the Thinking of the Future online project became tutors of school teams 365 80 thsd participants in just one year 2,100 240 The Foundation currently has several key programmes: ▪ Lift to the Future is a nationwide programme that combines career guidance, education, and employment opportunities at Sistema Group companies. ▪ Culture and Education - launch and support of projects to develop and promote an inclusive museum environment. ▪ Social Environment - support of underprivileged groups of population, implementation of projects supporting people and non-profits, events targeting interaction within various groups. ▪ Sistema Charity - development and promotion of best practices in the area of charity and social protection. The following events were organised as part of the Social Environment section. ▪ Sistema Fest regional festivals were held, with over 9,500 employees of the Corporation participating in them. ▪ Eleven Group companies in 13 regions of Russia joined a waste paper collecting campaign to support Lift Without Failure, an educational project for orphaned children. ▪ Over 50 corporate volunteering events took place, involving over 500 employees of the Group. Volunteers of Sistema Charitable Foundation spent over 3,000 hours doing charitable work. ▪ In order to promote sports and a healthy lifestyle, over 2,000 employees of the Group from 117 cities and towns took part in the #ZaLes charitable race, during which 5,200 trees were planted. ▪ Employees of the Group companies received 108 psychological consultations. In the area of culture and education Sistema Charity is one of the key focus areas of SCF. In 2022, the Foundation focused on social investments. It launched an intellectual club titled Sistema Experience, a platform where Group employees can exchange their experience. Also, 75 school and university students received scholarships as part of the Lift to the Future pilot scholarship programme, the financing of which totalled RUB 30m. SCF introduces digital solutions and new approaches that offer the most efficient way to increase accessibility of culture and art. In 2022, SCF supported opening of the first inclusive outreach exhibition project, Outside the Establishment. It was a project of the Russian Museum and the first large-scale attempt to exhibit works of modern non-professional artists with mental health issues and/or psychiatric experience. The project also included a number of educational and outreach events for professionals and for the public. Over 390,000 people took part in the project. employees of the Corporation participating in Sistema Fest 9,500 thsd people took part in the project Outside the Establishment 350 trees were planted in the #ZaLes charitable race 5,200 corporate volunteering events took place 50 188 189 SISTEMA PJSFC Annual report 2022 sistema.com Sustainability management AUDITED CONSOLIDATED FINANCIAL STATEMENTS 190 191 sistema.com SISTEMA PJSFC Annual report 2022 Audited Consolidated Financial Statements SISTEMA PJSFC AND SUBSIDIARIES Consolidated Financial Statements for 2022 and Independent Auditor’s Report SISTEMA PJSFC AND SUBSIDIARIES TABLE OF CONTENTS Page INDEPENDENT AUDITOR’ S REPORT 1-6 CONSOLIDATED FINANCIAL STATEMENTS FOR 2022: Consolidated statement of profit or loss 7 Consolidated statement of comprehensive income 8 Consolidated statement of financial position 9-10 Consolidated statement of changes in equity 11 Consolidated statement of cash flows 12-13 Notes to the consolidated financial statements 1. General 14 2. Basis of preparation 14 3. Significant accounting policies, judgements, estimates and assumptions 14 4. Segment information 19 5. Discontinued operations and subsidiaries disposals 22 6. Business combinations 26 7. Capital transactions of subsidiaries 37 8. Revenue 38 9. Impairment of long-lived assets 44 10. Impairment of financial assets 44 11. Income taxes 45 12. Employee benefits expenses 47 13. Property, plant and equipment 48 14. Investment property 51 15. Goodwill 52 16. Other intangible assets 56 17. Investments in associates and joint ventures 59 18. Other financial assets 64 19. Restricted cash 71 20. Inventories 71 21. Accounts receivable 72 22. Equity 73 23. Accumulated other comprehensive income 73 24. Loans and borrowings 74 25. Lease liabilities and right-of-use assets 78 26. Bank deposits and liabilities 79 27. Other financial liabilities 80 28. Provisions 80 29. Earnings/(loss) per share 82 30. Capital and financial risk management 82 31. Derivative instruments 86 32. Fair values 88 33. Related party transactions 91 34. Subsidiaries 92 35. Non-cash transactions 93 36. Reconciliation of liabilities arising from financing activities 94 37. Contingencies and commitments 95 38. Subsequent events 100 AO BST 5 Lesnaya Street Moscow, 125047, Russia Tel: +7 (495) 787 06 00 Fax: +7 (495) 787 06 01 delret.ru 1 INDEPENDENT AUDITOR’ S REPORT To the Shareholders and the Board of Directors of Sistema Public Joint Stock Financial Corporation Opinion We have audited the consolidated financial statements of Sistema Public Joint Stock Financial Corporation ( “ Sistema ” ) and its subsidiaries (the “ Group ” ), which comprise the consolidated statement of financial position as at 31 December 2022 and the consolidated statement of profit or loss, consolidated statement of comprehensive income, consolidated statement of changes in equity and consolidated statement of cash flows for the year then ended, and notes to the consolidated financial statements, including a summary of significant accounting policies. In our opinion, the accompanying consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Group as at 31 December 2022, and its consolidated financial performance and its consolidated cash flows for the year then ended in accordance with International Financial Reporting Standards ( “ IFRSs ” ). Basis for Opinion We conducted our audit in accordance with International Standards on Auditing ( “ ISAs ” ). Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Consolidated Financial Statements section of our report. We are independent of the Group in accordance with the Auditor’s Independence Rules and the Auditor’s Professional Ethics Code, that are relevant to our audit of the financial statements in the Russian Federation together with the ethical requirements of the International Ethics Standards Board for Accountants’ Code of Ethics for Professional Accountants (the “ IESBA Code ” ), and we have fulfilled our other ethical responsibilities in accordance with these requirements and the IESBA Code. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Key Audit Matters Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the consolidated financial statements of the current period. These matters were addressed in the context of our audit of the consolidated financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. 2 Why the matter was determined to be a key audit matter How the matter was addressed in the audit Significant non-routine transactions In light of its strategy, the Group regularly conducts complex acquisitions and disposals, debt restructurings and other significant non-routine transactions. In 2022 the non-routine transactions were conducted in the course of changing operating environment (see Note 37 to the consolidated financial statements). We focus on these matters because the appropriate accounting treatment of such transactions is often complex and requires exercise of significant judgement, in particular, in determining whether or not the Group has control over its investees, and whether or not the Group has assumed obligations to third-party investors. In the current period, these included, among others, sale of a stake in SFH Invest S.A., recognition of EWUB as assets held for sale, and other transactions involving the sale of shares in subsidiaries resulting in the loss of control by the Group. See Note 5 to the consolidated financial statements. Our procedures included reviewing legal documents to fully understand the terms and conditions of each transaction and therefore the associated accounting implications and evaluating documentation of management’s positions on how IFRSs were applied to the transactions. In relation to the previously mentioned specific transactions, we: analysed legal documents and evaluated the appropriateness of management’s conclusions on whether or not the Group has control over the investees in the context of investee’s governance structure, size of the Group’s shareholding relative to other shareholders, dispersion of other vote holdings and other factors relevant to determining whether the Group has current ability to direct relevant activities of the investees; analysed agreements and key terms of transactions on the disposal of Group’s subsidiaries and reviewed the reflection of the disposal in the consolidated financial statements; analysed management ’ s calculation of the expected credit losses allowance for the financial assets arising as a result of disposal; verified the compliance of the disclosures contained in the consolidated financial statements with IFRS requirements. In addition, we analysed management’ s assessment of the impact of changes in the operating environment on the Group’ s operations and significant non-routine transactions. Diversified structure of the Group Sistema is a holding company that owns mainly controlling stakes in its subsidiaries, whose results are included in the consolidated financial statements. The large number of entities of the Group and diversified nature of their operations require the Group’ s management to design and implement group wide controls, including monitoring and control activities We obtained an understanding of the group-wide controls over the consolidation process and the preparation of the consolidated financial statements, including instructions of the Group’ s management to its subsidiaries. Our audit approach was developed considering the Group’ s diversified structure and associated risks of material misstatement of the consolidated financial statements. It included determination of necessary procedures and audit scope in relation to each 3 Why the matter was determined to be a key audit matter How the matter was addressed in the audit to ensure timely, reliable and complete financial information received from its subsidiaries. Audit procedures regarding the financial information of the subsidiaries included in the consolidated financial statements may be performed by us or by the auditors of those subsidiaries (“ components ” ) acting under our supervision. As the group auditor, we are fully responsible for conducting the audit and forming our audit opinion. We focused on this matter because the diversified structure of the Group has a significant impact on our audit approach, and the nature and extent of our involvement in component auditors’ work is significant. component’ s financial information, depending on its significance for the Group and identification of risks of misstatement of their financial information. The nature and extent of our involvement in the component auditors’ work was also dependent on our assessment of their professional competence in the context of allocated scope. To obtain reasonable assurance of fair presentation of the components’ financial information, we assessed risks and determined audit procedures performed by the component auditors, and evaluated the results of the procedures. This included a critical analysis of the component auditors’ documentation, discussion of significant matters with the component auditors, component or Group management and, if applicable, designing and performing additional audit procedures. We also performed procedures with respect to consolidation adjustments to the financial information of the subsidiaries in order to assess their nature, completeness and accuracy. Compliance with anti-bribery laws and regulations and associated accounting and disclosure implications In March 2019, the Group’s subsidiary MTS reached a resolution with the United States Securities and Exchange Commission (“ SEC ” ) and the United States Department of Justice (“ DOJ ” ) relating to the investigation concerning the Group’s former subsidiary in Uzbekistan. The Group consented to the commencement of an administrative cease-and-desist order (the “ Order ” ) by the SEC and entered into a deferred prosecution agreement (“ DPA ” ). Under the DPA and the Order in September 2019 the Group appointed an independent compliance monitor (“ Independent Monitor ” ) for, inter alia, review, testing and improving MTS’ anti -corruption compliance code, policies, and procedures for a period of three years. In 2021, the DOJ and SEC approved a one year extension of the monitorship, which is permitted by the terms of the DPA and the Order. Our audit procedures related to the Group’ s estimation of any contingencies related to any potential instance of non-compliance with anti- corruption laws and regulations included the following, among others: We inspected the laws and regulations MTS has to comply with in order to obtain an understanding of the relevance and applicability to MTS and to assess any potential penalties that may arise for non- compliance; We read the procedures performed by the Independent Monitor and evaluated the implications of their findings, including discussing these with management as well as internal and external legal advisors; We inquired management regarding their follow up on the results of internal and external investigations and on the design and operational effectiveness of the MTS’ s compliance programs and internal controls relating to the prevention and detection of fraud and corruption; 4 Why the matter was determined to be a key audit matter How the matter was addressed in the audit The audit procedures necessary to evaluate management’ s judgments in area of potential instance of non-compliance with anti-corruption laws and regulations as at 31 December 2022 required a high degree of auditor judgment in evaluating whether the audit evidence obtained supports management’ s estimate. We tested the design and operating effectiveness of internal controls at MTS, including, amongst others, the control environment (including whistle-blower and internal fraud management cases) and the controls for the adherence of business partners to the anti-corruption codes; We read the minutes of the MTS Board of Directors’ meetings; We evaluated management ’ s assessment of compliance with anti-corruption laws and regulations as well as an estimation of contingencies related to any potential instances of non-compliance; We obtained letters from external and internal legal counsel; and We evaluated the Group ’ s accounting policy with respect to the accounting for provisions and disclosure of contingent liabilities to determine if the existing policy continues to be appropriate, and assessed the compliance of the disclosures in the consolidated financial statements against the requirements of IAS 37 “Provisions, Contingent Liabilities and Contingent Assets ” . Other Information Management is responsible for the other information. The other information comprises the information included in the Annual report for 2022 (the “ Annual report ”) and the Issuer’s report for 12 months of 2022 (the “ I ssuer’s repor t ” ), but does not include the consolidated financial statements and our auditor’ s report thereon. The Annual report and Issuer ’ s report are expected to be made available to us after the date of this auditor’ s report. Our opinion on the consolidated financial statements does not cover the other information and we will not express any form of assurance conclusion thereon. In connection with our audit of the consolidated financial statements, our responsibility is to read the other information identified above when it becomes available and, in doing so, consider whether the other information is materially inconsistent with the consolidated financial statements or our knowledge obtained in the audit, or otherwise appears to be materially misstated. When we read the Annual report and Issuer ’ s report, if we conclude that there is a material misstatement therein, we are required to communicate the matter to those charged with governance. 5 Responsibilities of Management and Those Charged with Governance for the Consolidated Financial Statements Management is responsible for the preparation and fair presentation of the consolidated financial statements in accordance with IFRSs, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. In preparing the consolidated financial statements, management is responsible for assessing the Group’ s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate the Group or to cease operations, or has no realistic alternative but to do so. Those charged with governance are responsible for overseeing the Group’ s financial reporting process. Auditor ’ s Responsibilities for the Audit of the Consolidated Financial Statements Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’ s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these consolidated financial statements. As part of an audit in accordance with ISAs, we exercise professional judgment and maintain professional skepticism throughout the audit. We also: Identify and assess the risks of material misstatement of the consolidated financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Group’ s internal control. Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management. Conclude on the appropriateness of management ’ s use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Group ’ s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor ’ s report to the related disclosures in the consolidated financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’ s report. However, future events or conditions may cause the Group to cease to continue as a going concern. 6 Evaluate the overall presentation, structure and content of the consolidated financial statements, including the disclosures, and whether the consolidated financial statements represent the underlying transactions and events in a manner that achieves fair presentation. Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Group to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision and performance of the group audit. We remain solely responsible for our audit opinion. We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. We also provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards. From the matters communicated with those charged with governance, we determine those matters that were of most significance in the audit of the consolidated financial statements of the current period, and are therefore the key audit matters. We describe these matters in our auditor’ s report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication. Vladimir Biryukov (ORNZ No21906100113), Engagement partner, Acting based on the power of attorney issued by the General Director on 06.07.2022 authorizing to sign off the audit report on behalf of AO “ Business Solutions and Technologies ” (ORNZ No 12006020384) 7 April 2023 7 SISTEMA PJSFC AND SUBSIDIARIES CONSOLIDATED STATEMENT OF PROFIT OR LOSS (In millions of Russian Rubles, except for per share amounts) 2022 2021 Continuing operations Revenue 8 912,656 773,218 Cost of sales (454,602) (363,358) Selling, general and administrative expenses (185,859) (147,648) Depreciation and amortisation (147,905) (133,069) (Impairment)/reversal of impairment of long-lived assets 9 (1,846) 603 Impairment of financial assets 10 (4,181) (4,003) Taxes other than income tax (4,958) (3,360) Share of the profit or loss of associates and joint ventures, net 17 4,199 19,830 Other income 6 50,060 16,248 Other expenses (6,317) (2,642) Operating income 161,247 155,819 Finance income 10,059 6,272 Finance costs (113,048) (70,153) Currency exchange gain/(loss) 37 (1,667) Changes in the fair value of financial instruments 9,803 16,050 Profit before tax 68,098 106,321 Income tax expense 11 (27,577) (41,330) Profit from continuing operations 40,521 64,991 Discontinued operations Profit/(loss) from discontinued operations 5 3,296 (11,809) Net profit for the year 43,817 53,182 Attributable to: Shareholders of Sistema PJSFC 19,405 16,755 Non-controlling interests 24,412 36,427 43,817 53,182 Profit per share (basic and diluted), Russian Rubles: 29 From continuing operations 1.56 2.95 From continuing and discontinued operations 2.07 1.77 Notes The accompanying notes are an integral part of these consolidated financial statements. The consolidated financial statements of the Group for 2022 were approved by: ___ Tagir Sitdekov Chief Executive Officer (President) ___ Rovshan Aliyev Vice President for Finance (CFO) 7 April 2023 8 SISTEMA PJSFC AND SUBSIDIARIES CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (In millions of Russian Rubles) 2022 2021 Net profit for the year 43,817 53,182 Other comprehensive income/(loss) Items that may be reclassified subsequently to profit or loss: Effect on sale of subsidiary 794 - Currency translation gain/(loss) on foreign operations in subsidiaries 1,284 (1,458) Currency translation (loss)/gain on foreign operations in associates and joint ventures (599) 95 Net loss from revaluation of financial instruments (134) - Items that will not be reclassified subsequently to profit or loss: Unrecognised actuarial gain - 215 Other comprehensive income/(loss), net of tax 1,345 (1,148) Total comprehensive income 45,162 52,034 Attributable to: Shareholders of Sistema PJSFC 20,019 14,787 Non-controlling interests 25,143 37,247 Total comprehensive income 45,162 52,034 The accompanying notes are an integral part of these consolidated financial statements. 9 SISTEMA PJSFC AND SUBSIDIARIES CONSOLIDATED STATEMENT OF FINANCIAL POSITION (In millions of Russian Rubles) 31 December 31 December Notes 2022 2021 Assets Non-current assets Property, plant and equipment 13 548,305 514,198 Investment property 14 13,165 13,160 Goodwill 15 100,063 88,050 Other intangible assets 16 159,260 139,184 Right-of-use assets 25 201,564 210,480 Investments in associates and joint ventures 17 43,460 63,490 Deferred tax assets 11 43,231 30,956 Other financial assets 18 203,878 214,986 Deposits in banks 115 20 Other assets 23,703 36,157 Total non-current assets 1,336,744 1,310,681 Current assets Inventories 20 243,343 76,009 Contract assets 8 30,149 8,272 Accounts receivable 21 96,304 69,295 Advances paid and prepaid expenses 33,789 18,179 Current income tax assets 4,057 5,103 Other taxes receivable 28,632 24,930 Other financial assets 18 171,817 154,465 Deposits in banks 85 1,549 Restricted cash 19 1,089 4,909 Cash and cash equivalents 134,402 81,883 Assets classified as held for sale 5 11,064 - Other assets 6,668 3,610 Total current assets 761,399 448,204 Total assets 2,098,143 1,758,885 10 SISTEMA PJSFC AND SUBSIDIARIES CONSOLIDATED STATEMENT OF FINANCIAL POSITION (CONTINUED) (In millions of Russian Rubles) 31 December 31 December 2022 2021 Equity and liabilities Equity Share capital 22 869 869 Treasury shares 22 (5,675) (6,435) Additional paid-in capital 94,578 95,075 Accumulated loss (1,988) (21,393) Accumulated other comprehensive income 23 17,399 16,785 including accumulated comprehensive income of assets classified as held for sale 5 5,961 - Equity attributable to shareholders of Sistema 105,183 84,901 Non-controlling interests 82,348 40,545 Total equity 187,531 125,446 Non-current liabilities Loans and borrowings 24 762,219 641,511 Lease liabilities 25 156,527 167,238 Bank deposits and liabilities 26 12,397 16,755 Deferred tax liabilities 11 57,350 42,406 Provisions 28 8,445 8,026 Other financial liabilities 27 25,050 15,972 Other liabilities 15,413 11,334 Total non-current liabilities 1,037,401 903,242 Current liabilities Loans and borrowings 24 298,846 209,306 Lease liabilities 25 29,303 23,335 Accounts payable 137,508 134,033 Bank deposits and liabilities 26 232,610 225,795 Income tax payable 3,842 951 Other taxes payable 39,541 22,896 Dividends payable 17,989 5,256 Provisions 28 27,447 23,256 Contract liabilities and other liabilities 8 56,506 53,330 Liabilities directly associated with assets classified as held for sale 5 4,838 - Other financial liabilities 27 24,781 32,039 Total current liabilities 873,211 730,197 Total equity and liabilities 2,098,143 1,758,885 Notes The accompanying notes are an integral part of these consolidated financial statements. 11 SISTEMA PJSFC AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (In millions of Russian Rubles) Equity attributable to Non- Additional Treasury Accumulated Currency shareholders controlling Share capital paid-in capital shares loss reserve Other of Sistema interests Total equity 1 January 2021 869 75,279 (3,029) (27,025) 17,934 819 64,847 22,482 87,329 Net profit for the period - - - 16,755 - - 16,755 36,427 53,182 Other comprehensive (loss)/income, net of tax - - - - (1,961) (7) (1,968) 820 (1,148) Total comprehensive income/(loss) - - - 16,755 (1,961) (7) 14,787 37,247 52,034 Acqusition and sale of subsidiaries - - - - - - - 15,313 15,313 Accrued compensation under long-term motivation programs - 442 1,521 - - - 1,963 - 1,963 Settlements under long-term motivation programs - 1,374 - - - - 1,374 3,016 4,390 Capital transactions of subsidiaries (Note 7) - 24,060 - - - - 24,060 10,910 34,970 Purchase of own shares - - (5,425) - - - (5,425) - (5,425) Sale of own shares - (218) 498 - - - 280 - 280 Effect of derivatives reclassification (Note 6) - (5,861) - (8,179) - - (14,040) (13,881) (27,921) Dividends declared by Sistema PJSFC - - - (2,944) - - (2,944) - (2,944) Dividends declared by subsidiaries - - - - - - - (34,543) (34,543) 31 December 2021 869 95,076 (6,435) (21,393) 15,973 812 84,902 40,544 125,446 1 January 2022 869 95,076 (6,435) (21,393) 15,973 812 84,902 40,544 125,446 Net profit for the period - - - 19,405 - - 19,405 24,412 43,817 Effect on sale of subsidiary - - - - 397 - 397 397 794 Other comprehensive (loss)/income, net of tax - - - - (426) 643 217 334 551 Total comprehensive income/(loss) - - - 19,405 (29) 643 20,019 25,143 45,162 Acqusition and sale of subsidiaries - - - - - - - 46,971 46,971 Accrued compensation under long-term motivation programs - (617) 1,053 - - - 436 - 436 Settlements under long-term motivation programs of subsidiaries - 1,818 - - - - 1,818 1,883 3,701 Capital transactions of subsidiaries (Note 7) - (1,699) - - - - (1,699) 546 (1,153) Purchase of own shares - - (293) - - - (293) - (293) Dividends declared by subsidiaries - - - - - - - (32,739) (32,739) 31 December 2022 869 94,578 (5,675) (1,988) 15,944 1,455 105,183 82,348 187,531 comprehensive Accumulated other income/(loss) The accompanying notes are an integral part of these consolidated financial statements. 12 SISTEMA PJSFC AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS (In millions of Russian Rubles) 2022 2021 Cash flows from operating activities Net profit for the year 43,817 53,182 Adjustments for: Depreciation and amortisation 148,778 134,531 Share of the profit or loss of associates and joint ventures, net (4,199) (19,830) Finance income (10,111) (6,306) Finance costs 115,666 71,510 Changes in the fair value of financial instruments (9,959) (15,935) Income tax expense 27,968 40,272 Currency exchange loss 201 1,651 Gain from discontinued operations (15,485) (470) Profit on disposal of property, plant and equipment (1,747) (3,483) Profit on disposal of other assets 825 - Expected credit losses allowance on loans to customers 25,155 12,218 Non-cash compensation to employees 3,682 7,045 Impairment/(reversal of impairment) of long-lived assets 1,362 (408) Impairment of financial assets 4,777 4,101 Other non-cash items (2,517) (5,311) Profit from bargain purchase (Note 6) (32,269) - 295,944 272,767 Movements in working capital: Bank loans to customers and interbank loans due from banks (43,157) (102,038) Bank deposits and liabilities 7,773 46,161 Restricted cash (19,904) 163 Financial assets at fair value through profit or loss 986 (919) Accounts receivable (29,276) (1,671) Advances paid and prepaid expenses (24,606) (665) Other taxes receivable 1,007 (4,700) Inventories (49,634) (18,277) Accounts payable 7,832 (7,892) Subscriber prepayments (549) 2,215 Other taxes payable 16,648 5,277 Advances received and other liabilities 22,010 27,312 Interest paid (115,805) (71,469) Income tax paid (25,327) (31,708) Dividends received from associates and joint ventures 5,025 7,015 Net cash provided by operating activities 48,967 121,571 13 SISTEMA PJSFC AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS (CONTINUED) (In millions of Russian Rubles) 2022 2021 Cash flows from investing activities Payments for purchases of property, plant and equipment (110,969) (123,541) Proceeds from sale of subsidiaries, net of cash 1,986 1,336 Proceeds from sale of property, plant and equipment 6,448 6,141 Payments to obtain and fulfill contracts (4,351) (4,224) Payments for purchases of intangible assets (47,590) (43,635) Payments for businesses, net of cash acquired 6,224 (36,153) Payments for investments in associates and joint ventures (8,881) (11,522) Payments for financial assets, long-term (13,739) (25,848) Proceeds from sale of financial assets, long-term 18,443 10,503 Payments for financial assets, short-term (23,440) (4,888) Proceeds from sale of financial assets, short-term 26,315 6,105 Interest received 9,165 6,739 Other 828 (217) Net cash used in investing activities (139,561) (219,204) Cash flows from financing activities Proceeds from borrowings 515,950 259,820 Principal payments of loans and borrowings (316,092) (147,999) Debt issuance costs (950) (308) Principal payments of lease liabilities (22,964) (19,682) Acquisition of non-controlling interests in existing subsidiaries (2,412) (34,454) Proceeds from transactions with non-controlling interests 140 50,366 Dividends paid (20,807) (35,557) Deferred payments for acquisition of subsidiaries (2,470) - Other financing activities (1,900) - Repurchase of own shares (293) (5,425) Net cash provided by financing activities 148,202 66,761 Effect of foreign currency translation on cash and cash equivalents 805 (938) Net increase/(decrease) in cash and cash equivalents 58,413 (31,810) - Cash and cash equivalents at the beginning of the year 81,883 113,693 - - Cash and cash equivalents at the end of the year 140,296 81,883 Less cash and cash equivalents attributable to (5,894) - assets classified as held for sale Cash and cash equivalents at the end of the year 134,402 81,883 The accompanying notes are an integral part of these consolidated financial statements. SISTEMA PJSFC AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (amounts in millions of Russian Rubles, unless otherwise stated) 14 1. GENERAL Sistema Public Joint Stock Financial Corporation or Sistema PJSFC (the “ Company ” , together with its subsidiaries, the “ Group ” ) invests in, and manages a range of companies which operate in various sectors of economy, including telecommunications, retail, high technology, finance, pulp and paper, utilities, pharmaceuticals, healthcare, agriculture, real estate and tourism. The Company and the majority of its subsidiaries are incorporated in the Russian Federation ( “ RF ” ). The Company ’ s registered address is building 1, 13 Mokhovaya street, 125009, Moscow. As at 31 December 2022, Vladimir Petrovich Yevtushenkov owns a 49.2% stake in PJSC AFK Sistema (as at 31 December 2021 – 59.2%). In 2022, Vladimir Petrovich Yevtushenkov transferred his 10% stake, thereby ceasing to be the holder of the majority of shares. 50.8% of the shares belong to a significant number of shareholders (as at 31 December 2021- 40.8%). The shares are listed on the London Stock Exchange in the form of Global Depositary Receipts (“ GDRs ” ) and on the Moscow and SPB Exchanges. 2. BASIS OF PREPARATION These consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (“ IFRSs ” ) as issued by the International Accounting Standards Board (“ IASB ” ). These consolidated financial statements have been prepared on the assumption that the Group will continue to operate in the foreseeable future. As at 31 December 2022 short-term liabilities of the Group exceeded its current assets by RUB 111,812 million. The Group determines that it generates sufficient operating cash flow and has sufficient cash available to repay the Group’ s current liabilities, including, if necessary, unused credit facilities of RUB 673,134 million. The cash flows forecast prepared by the management of the Group for a period of at least twelve months after the end of the reporting period demonstrates the Group’s ability to pay off current liabilities within the terms set by the contractual obligations. Comparative information for the year ended 31 December 2021 has been retrospectively adjusted for the completion of the allocation of the purchase price of businesses acquired in 2021 (Note 6) and reclassification to discontinued operations (Note 5). These consolidated financial statements were approved by the Company’s Chie f Executive Officer (President) and authorised for issue on 7 April 2023. 3. SIGNIFICANT ACCOUNTING POLICIES, JUDGEMENTS, ESTIMATES AND ASSUMPTIONS This note sets out significant accounting policies that relate to the Group’s consolidated financial statements as a whole and describes the critical accounting judgements that management has identified as having a potentially material impact on the Group’s consolidated financial statements. When an accounting policy is generally applicable to a specific note to the accounts, the policy is described within that note. SISTEMA PJSFC AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (amounts in millions of Russian Rubles, unless otherwise stated) 15 Summary of significant accounting policies Basis of consolidation. The consolidated financial statements incorporate the financial statements of the Company, entities controlled by the Company and their subsidiaries. Control is achieved when the Company: Has the power over the investee; Is exposed, or has rights, to variable returns from its involvement with the investee; and Has the ability to use its power to affect its returns. The Company reassesses whether or not it controls an investee if facts and circumstances indicate that there are changes to one or more of the three elements of control listed above. When the Company has less than a majority of the voting rights of an investee, it has power over the investee when the rights are sufficient to give it the practical ability to direct the relevant activities of the investee unilaterally. The Company considers all relevant facts and circumstances in assessing whether or not the Company’s voting rights in an investee are sufficient to give it power, including: The size of the Company’s holdi ng of voting rights relative to the size and dispersion of holdings of the other vote holders; Potential rights held by the Company, other vote holders or other parties; Rights arising from other contractual arrangements; and Any additional facts and circumstances that indicate that the Company has, or does not have, the current ability to direct the relevant activities at the time that decisions need to be made, including voting patterns at previous shareholders’ meetings. Consolidation of a subsidiary begins when the Company obtains control over the subsidiary and ceases when the Company loses control of the subsidiary. Specifically, income and expenses of a subsidiary acquired or disposed of during the year are included in the consolidated statement of profit or loss from the date the Company gains control until the date when the Company ceases to control the subsidiary. Profit or loss and each component of other comprehensive income is attributed to the owners of the Company and to the non-controlling interests. Total comprehensive income of subsidiaries is attributed to the owners of the Company and to the non-controlling interests even if this results in the non-controlling interests having a deficit balance. When necessary, adjustments are made to the financial statements of subsidiaries to bring their accounting policies in line with the Group’s accounting policies. All intragroup assets and liabilities, equity, income, expenses and cash flows relating to transactions between members of the Group are eliminated in full on consolidation. Non-current assets held for sale and discontinued operations . The Group classifies assets and disposal groups as held for sale if their carrying amount will be recovered principally through a sale transaction rather than through continuing use. This condition is met only when the assets (or disposal groups) are available for immediate sale in its present condition subject only to terms that are usual and customary for sale of such assets (or disposal groups) and their sale is highly probable to occur within a year. Assets classified as held for sale and disposal groups are measured at the lower of carrying amount or fair value less cost to sell. SISTEMA PJSFC AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (amounts in millions of Russian Rubles, unless otherwise stated) 16 Assets and liabilities classifies as held for sale are presented separately as current items in the consolidated statement of financial position. A disposal group qualifies as discontinued operation if it is a component of the Group that either has been disposed of or is classified as held for sale, and: Represents a separate major line of business or geographical area of operations of the Group; Is part of a single coordinated plan to dispose of a separate major line of business or geographical area of operations of the Group; Or is a subsidiary acquired exclusively with a view to resale. Discontinued operations are excluded from the results of continuing operations and are presented as a single amount as profit or loss after tax from discontinued operations in the consolidated statement of profit or loss. Consolidated statement of cash flows include both cash flows from continuing and discontinued operations, amounts related to discontinued operations by operating, investing and financing activities are presented in Note 5. Non-controlling interests. Non-controlling interests represent the equity in a subsidiary not attributable, directly or indirectly, to a parent. Non-controlling interests are presented separately in the consolidated statement of profit or loss and within equity in the consolidated statement of financial position, separately from parent shareholders’ equity. Functional currency. Items included in the financial statements of each of the Group’s entities are measured using the currency of the primary economic environment in which the entity operates (functional currency). The functional currency of the Group and the majority of its subsidiaries operating in Russia is the Russian Ruble (“ RUB ” ). The presentation currency of the consolidated financial statements of the Group is also the Russian Ruble. Sources of estimation uncertainty In the application of the Group’s accounting policies management is required to make estimates and assumptions about the carrying amounts of assets and liabilities that are not readily apparent from other sources. The estimates and associated assumptions are based on historical experience and other factors that are considered to be relevant. Actual results may differ from these estimates. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period or in the period of the revision and future periods if the revision affects both current and future periods. Lease liabilities. The Group uses management’s judgement to estimate: Lease term. The lease term corresponds to the non-cancellable period of each contract except in cases where the Group is reasonably certain of exercising renewal options. The Group also considers the cases where the Group is reasonably certain of not exercising early termination options. When assessing such options management assesses residual useful life of the major non-separable improvements to the respective leased premises, investment strategy of the Group and relevant investment decisions and duration of the renewal and early termination options. SISTEMA PJSFC AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (amounts in millions of Russian Rubles, unless otherwise stated) 17 Discount rate. When calculating the present value of the lease payments the Group uses the incremental borrowing rate. Discount rate is determined for each asset based on the incremental borrowing rate for the respective company of the Group at the inception of the contract. Stage of completion of project type contracts. The Group uses management’s judgement to estimate stage of completion to recognize revenue under project type contracts. This estimate is based on costs forecasts and calculations and historical experience on similar projects. Impairment of financial assets. The Group regularly reviews its financial assets to assess for impairment. The Group uses management’s judgement to estimate allowance for Expected Credit Losses (ECL). Allowance for ECL are measured in a way that reflects the unbiased and probability- weighted amount, the time-value of money and reasonable and supportable information at the reporting date pertaining to past events, current conditions and forecasts of future economic conditions. ECL are measured as probability-weighted present value of all cash shortfalls over the expected life of each financial asset. For receivables from financial services, ECL are mainly calculated using a statistical model based on three major risk parameters: probability of default, loss given default and exposure of default. The estimation of these risk parameters incorporates all available relevant information, not only historical and current loss data, but also reasonable and supportable forward-looking information reflected by the future expectation factors. This information includes macroeconomic factors (unemployment rate, inflation rate) and forecasts of future economic conditions. Significant changes in risk parameters could affect the estimated amount of ECL. Impairment of long-lived assets. IFRS requires management to perform impairment tests annually for indefinite lived assets and, for finite lived assets, if events or changes in circumstances indicate that their carrying amounts may not be recoverable. Impairment testing requires management to judge whether the carrying value of assets can be supported by the higher of the fair value of the asset or the net present value of future cash flows that they generate. Calculating the net present value of the future cash flows requires assumptions to be made in respect of highly uncertain matters. Recoverable amount of cash-generating units is estimated based on value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset for which the estimates of future cash flows have not been adjusted. The growth rate in the post-forecast period is determined on the basis of the nominal GDP growth rate for each country and adjusted for the specific risk inherent in each generating unit. The discount rate used to calculate value in use is the weighted average cost of capital, calculated on the basis of the average capital structure for the economic sector. The cost of equity is determined on the basis of the risk-free rate for long-term government bonds issued in the country in which the generating unit operates. These rates are adjusted for the risk premium reflecting the risk of investing in ordinary shares and the specific risk of each cash-generating unit. Deferred tax assets. Deferred tax asset is recognised to the extent that it is probable that taxable profits will be available against which deductible temporary differences can be utilised. The valuation of probability is based on management estimation of future taxable profit and includes significant management judgment. SISTEMA PJSFC AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (amounts in millions of Russian Rubles, unless otherwise stated) 18 Fair value measurements. Some of the Group’s assets and l iabilities are measured at fair value for financial reporting purposes. Where the fair value of assets and liabilities recorded in the consolidated statement of financial position cannot be derived from active markets, their fair value is determined using valuation techniques, including discounted cash flow models. The inputs to these models are taken from observable markets where possible, but when this is not feasible, a degree of judgment is required in establishing fair values. Information about assets and liabilities measured at fair value on recurring basis is disclosed in Note 32. Useful lives of property, plant and equipment and intangible assets. Estimates may change due to technological developments, competition, changes in market conditions and other factors and may result in changes in the estimated useful life and in the amortisation or depreciation charges. Technological developments are difficult to predict and management views on the trends and pace of development may change over time. The estimated useful lives are reviewed at the end of each reporting period, with the effect of any changes in estimate being accounted for on a prospective basis. Provisions and contingencies. The Group is subject to various legal proceedings, disputes, claims and regulatory reviews related to the Group’s business, licenses, tax positions and investments, where the outcomes are subject to significant uncertainty. Management evaluates, among other factors, the degree of probability of an unfavourable outcome and the ability to make a reasonable estimate of the amount of loss or related expense. Unanticipated events or changes in these factors may require the Group to increase or decrease the amount recorded or to be recorded for a matter that has not been previously recorded because it was not considered probable. See Notes 28 and 37 for further information. Critical judgments in applying accounting policies The following are the critical judgements, apart from those involving estimations, that management have made in the process of applying the Group’s accounting policies and that have the most significant effect on the amounts recognised in consolidated financial statements. Management’s j udgments in assessing control and classification as assets held for sale – The Group regularly carries out complex structured transactions including acquisition and disposal of shares in subsidiaries, debt restructuring and financing arrangements. Determining the accounting treatment of such transactions is often complex and requires management’s judgment, in particular in determining whether or not the Group has control over the investees, and whether or not the Group has obligations to third-party investors. In 2022, transactions in respect of which management has made significant judgments in these areas include the Group’s acquisition of control over Etalon Group (Note 6), retaining control in MTS Group (Note 34), recognition of EWUB as assets held for sale, sale of a stake in SFH Invest S.A. and other transactions involving the disposal of subsidiaries resulting in the loss of control by the Group (Note 5). Standards, interpretations and amendments adopted in current year In 2022 the Group adopted the following standards, interpretations and amendments: Amendments to IFRS 37 Onerous Contracts – Cost of Fulfilling a Contract Amendments to IFRS 16 Property, Plant and Equipment— Proceeds before Intended Use Amendments to IFRS 3 Reference to the Conceptual Framework Annual improvements to IFRS Accounting Standards 2018-2020 Cycle Amendments to IFRS 1 First-time Adoption of International Financial Reporting Standards, IFRS 9 Financial Instruments, IFRS 16 Leases, IAS 41 Agriculture SISTEMA PJSFC AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (amounts in millions of Russian Rubles, unless otherwise stated) 19 These IFRS pronouncements do not have a material impact on the Group’s consolidated financial statements. Standards, interpretations and amendments in issue but not yet effective The Group has not applied the following new and revised IFRSs that have been issued but are not yet effective: IFRS 17 and amendments to IFRS 17 Insurance Contracts Amendments to IFRS 10 and IAS 28 Sale of Contribution of Assets between an Investor and its Associate or Joint Venture Amendments to IAS 1 Classification of Liabilities as Current or Non-current Amendments to IAS 1 and IFRS Practice Statement 2 Disclosure of accounting policy, long-term obligations with covenants Amendments to IAS 8 Definition of Accounting Estimate Amendments to IAS 12 Deferred tax on assets and liabilities arising from a single transaction Amendments to IFRS 16 Lease obligations for sale with leaseback The Group does not expect that the adoption of these standards will have a material impact on the Group's consolidated financial position and financial performance in future periods. 4. SEGMENT INFORMATION As a diversified holding corporation, the Company invests in a range of businesses, which meet its investment and return criteria. The Company has determined that the chief operating decision maker (“ CODM ” ) is Management Board. Information reported to the Management Board for the purpose of resource allocation and the assessment of segment performance is focused on each individual business. No operating segments have been aggregated in arriving at the reportable segments of the Group. The Group’s reportable segments are businesses that offer different products and services and are managed separately. The Group’s reportable segments are Mobile TeleSystems PJSC ( “ MTS ” ), Segezha Group PJSC (“ Segezha Group ” ), Etalon Group PLC ( “ Etalon ” ), Medsi Group JSC ( “ Medsi ” ), Ozon Holdings PLC (“ Ozon ” ) and Corporate. MTS is one of the leading telecommunications group in Russia and the CIS, offering mobile and fixed voice, broadband, internet access, pay TV, financial services, as well as content and entertainment services in Russia and Armenia. Segezha Group is a Russian vertically integrated forest industry holding that performs a full cycle of timber harvesting and advanced wood processing operations. Etalon is one of the largest real estate development company in Russia, specializing in residential real estate development, design, construction, service and operation. Medsi is the largest federal private network of medical and preventive institutions in the country, providing a full range of services for the prevention, diagnosis and treatment of diseases, as well as rehabilitation services for children and adults. Ozon is one of the largest Russian e-commerce internet platforms. Corporate segment comprises the Company and entities, which hold and manage the Company’s interests in its subsidiaries, joint ventures and associates. The Other category includes other operating segments including East-West United Bank (EWUB), Sitronics, Agroholding “ Steppe ” (Steppe), Sistema Venture Capital, Hospitality assets, Bashkirian Power Grid Company ( “ BPGC ” ), Business Nedvizhimost, Binnopharm Group, Fishing industry companies, “ Arkhyz ” , “ Vologodskiy tekstil ” , Megapolis-Invest, “ New Investment Holding ” , none of which meets the quantitative thresholds for determining reportable segments. SISTEMA PJSFC AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (amounts in millions of Russian Rubles, unless otherwise stated) 20 The accounting policies of the operating segments are the same as those described in the Significant accounting policies, judgements, estimates and assumptions (Note 3) and other relevant notes. The Group’s CODM evaluates performance of the segments on the basis of operating income and OIBDA. OIBDA is defined as operating income before depreciation and amortisation of property, plant and equipment, intangible assets and right-of-use assets. The following is an analysis of the Group’s revenue and results fr om continuing operations by reportable segment for 2022 and 2021: 2022 2021 2022 2021 2022 2021 MTS 536,508 523,699 5,240 4,222 109,325 117,405 Segezha Group 106,728 92,438 38 4 10,099 22,351 Etalon 60,246 - 249 - 17,263 - Medsi 35,958 30,040 19 47 2,427 3,978 Ozon (Note 17) - - - - - (12,584) Corporate 3,297 3,427 2,409 903 6,551 5,955 Total reportable segments 742,737 649,604 7,955 5,176 145,665 137,105 Other 169,919 123,614 15,107 15,350 17,140 21,129 912,656 773,218 23,062 20,526 162,805 158,234 Inter-segment eliminations (1,558) (2,415) Operating income 161,247 155,819 Finance income 10,059 6,272 Finance costs (113,048) (70,153) Currency exchange gain/(loss) 37 (1,667) Changes in the fair value of financial instruments 9,803 16,050 Profit before tax 68,098 106,321 revenues revenue income/(loss) External Inter-segment Segment operating SISTEMA PJSFC AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (amounts in millions of Russian Rubles, unless otherwise stated) 21 The following is an analysis of the Group’s depreciation and amortisation, additions to non -current assets (comprising property, plant and equipment, investment property, other intangible assets, right-of-use assets and advances paid for non-current assets), impairment of certain long-lived assets and other non-cash items (comprising impairment of current assets and financial assets) by reportable segment: 2022 2021 2022 2021 2022 2021 2022 2021 MTS 114,692 141,400 114,491 110,962 489 17 1,904 711 Segezha Group 14,118 24,490 14,551 6,902 13 907 (61) 339 Medsi 15,587 7,639 4,276 3,256 - - 40 67 Etalon 3,575 - 282 - - - 973 - Corporate 3,342 1,446 364 963 (1) 5 829 2,190 Other 23,146 27,099 13,941 10,986 1,345 (1,532) 496 696 174,460 202,074 147,905 133,069 1,846 (603) 4,181 4,003 (Reversal) of impairment/ im- Other non-current assets and amortisation current assets non-cash items Additions to Depreciation pairment of non- The following is an analysis of the Group’s segment assets and liabilities by reportable segment: 31 December 31 December 2022 2021 Segment assets MTS 1,092,908 1,028,277 Segezha Group 226,896 212,755 Etalon 277,986 - Medsi 55,357 49,847 Corporate 181,684 169,853 Total reportable segments 1,834,831 1,460,732 Other 382,936 397,181 Total segment assets 2,217,767 1,857,913 Inter-segment eliminations (119,624) (99,028) Consolidated total assets 2,098,143 1,758,885 Segment liabilities MTS 1,084,163 1,001,311 Segezha Group 186,040 167,756 Etalon 179,314 - Medsi 29,124 24,925 Corporate 283,568 256,491 Total reportable segments 1,762,209 1,450,483 Other 234,981 269,387 Total segment liabilities 1,997,190 1,719,870 Inter-segment eliminations (86,578) (86,431) Consolidated total liabilities 1,910,612 1,633,439 SISTEMA PJSFC AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (amounts in millions of Russian Rubles, unless otherwise stated) 22 As at 31 December 2022 and 2021 the carrying amount of investment in MTS Belarus, an associate of MTS, included in its reportable segment assets was RUB 5,798 million and RUB 6,265 million, respectively. The carrying amount of investment in Ozon, included in assets of Corporate, as at 31 December 2022 and 2021 was RUB 0 million. The carrying amount of investments in other associates and joint ventures representing separate operating segments are included in the assets of Corporate. The Group’s revenue from continuing operations from ext ernal customers and information about its non-current assets (property, plant and equipment, investment property, other intangible assets, right-of-use assets, advance payments for non-current assets and goodwill) by location of assets are detailed below. 2022 2021 2022 2021 Russia 798,107 691,209 1,020,594 964,116 Other 114,549 82,009 20,216 19,935 912,656 773,218 1,040,810 984,051 Revenue from external customers Non-current assets 5. DISCONTINUED OPERATIONS AND SUBSIDIARIES DISPOSALS The Group enters into transactions to sell shares of subsidiaries, which result in the Group losing control over its subsidiaries. The results of subsidiaries disposed of during the reporting period are included in the consolidated financial statements prior to the date of loss of control over subsidiaries. Discontinued operations Information on the sale of shares in subsidiaries, representing separate major lines of business or geographical areas at operations, and their impact on the Group's results is provided below . The amounts recognised in profit/(loss) from discontinued operations are as follows: 2022 2021 NVision Czech Republic a.s. results prior to disposal date 234 322 Loss from disposal of NVision Czech Republic a.s. (1,285) - Currency translation on disposal of VF Ukraine - 93 Change in the fair value of contingent consideration VF Ukraine (1,867) 378 Non-core assets results prior to disposal date (9,273) (12,630) Gain from disposal of non-core assets 20,111 - Assets classified as held for sale results prior to disposal date - (loss)/gain (3,150) 28 Impairment loss recognised of revaluation to FVLCD of assets classified as held for sale (1,474) - Profit/(loss) from discontinued operations 3,296 (11,809) Attributable to: Shareholders of Sistema PJSFC 1,800 (12,431) Non-controlling interests 1,496 233 SISTEMA PJSFC AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (amounts in millions of Russian Rubles, unless otherwise stated) 23 VF Ukraine – on November 22, 2019, the Group entered into a sale agreement to dispose of Preludium B.V., 100% owner of PJSC “ Vodafone Ukraine ” and its subsidiaries, which carried out the MTS operations in Ukraine. The disposal was completed on December 3, 2019, and the results of operations in Ukraine were reported as discontinued operations in the consolidated statements of profit or loss. According to the terms of the sale agreement, an additional consideration based on the performance of the discontinued operations in Ukraine was receivable. The Group received the first part of the additional contingent consideration in the amount of RUB 1,234 million in March 2021. The Group recognized contingent consideration receivable of RUB 1,867 million as at December 31, 2021. In 2022 following uncertainty over the receipt of the consideration and economic volatility and sanctions in Russia, the Group created expected credit allowance for the total amount of receivable and its value decreased to nil. NVision Czech Republic a.s. – In October 2022, the Group disposed of 100% in NVision Czech Republic a.s., which was included in MTS reportable segment. The disposal was completed on October 24, 2022, and the results of operations of NVision Czech Republic a.s. were reported as discontinued operations in the accompanying consolidated statements of profit or loss. The fair value of consideration, receivable in five-year term, amounted to RUB 453 million, of which RUB 50 million were received in 2022. EWUB – In October 2022, the Group decided to dispose of a 100% stake in EWUB, which is part of the “ Other ” reportable segment. The transaction price will be determined based on the results of an independent appraisal. The completion of the transaction is planned to be carried out during 2023. As at 31 December 2022, the Group classified EWUB as assets held for sale and presented as discontinued operations in the accompanying consolidated statement of profit and loss including impairment loss to fair value less costs of disposal. Non – core assets – In September 2022, the Group disposed of a number of non-core assets that were part of the “ Other ” reportable segment for the consideration of RUB 3,856 million in cash. This decision was made by the Group in connection with the current macroeconomic situation in order to optimize the structure of the Group. The results of the companies’ activities are presented as part of discontinued operations in the accompanying consolidated statement of profit and loss for all periods presented. The accompanying statements of financial position and statements of cash flows were not retrospectively restated. (Loss)/gain from disposal is presented as follows: NVision Czech Republic a.s. VF Ukraine Non-core assets EWUB Net (assets)/liabilities at the date of disposal (1,820) - 15,503 - Non-controlling interests at the date of disposal - - 752 - Change in the fair value of contingent consideration - revaluation at fair value 4 (1,867) - - Change of contingent consideration - currency exchange gain 78 - - - Received consideration 453 - 3,856 - Impairment of asset classified as assets held for sale - - - (1,474) (1,285) (1,867) 20,111 (1,474) 2022 SISTEMA PJSFC AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (amounts in millions of Russian Rubles, unless otherwise stated) 24 The results of the disposed subsidiaries included in discontinued operations in the consolidated statements of profit or loss for 2022 and 2021 are as follows: 2022 2021 2022 2021 2022 2021 Revenue 6,004 6,482 13,160 20,473 474 2,226 Expenses (5,802) (6,117) (22,900) (34,275) (4,051) (2,126) Profit/(loss) before tax 202 365 (9,740) (13,802) (3,577) 100 Income tax benefit/(expense) 32 (43) 468 1,172 427 (72) Net income/(loss) attributable to discontinued operations 234 322 (9,272) (12,630) (3,150) 28 NVision Czech Republic a.s. Non-core assets EWUB Cash flows from discontinued operations included in the consolidated statements of cash flows for 2022 and 2021 are as follows: 2022 2021 2022 2021 2022 2021 2022 2021 Net cash provide by/(used in) operating activities 61 (204) - - (13,264) (3,245) (22,125) 3,560 Net cash (used in)/provided by investing activities (69) 356 - 1,234 (1,620) (6,137) 16,038 (1,657) Net cash provided by/(used in) financial activities 31 (154) - - 35,244 2,817 - - Total net cash increase/(decrease) in cash and cash equivalents 23 (2) - 1,234 20,360 (6,565) (6,087) 1,903 EWUB NVision Czech Republic a.s. VF Ukrane Non-core assets SISTEMA PJSFC AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (amounts in millions of Russian Rubles, unless otherwise stated) 25 As at 31 December 2022, EWUB assets and liabilities of EWUB classified as held for sale as follows: 31 December 2022 Assets Current assets Cash and cash equivalents 5,894 Other financial assets 1,522 Advances paid 52 Total current assets 7,468 Non-current assets Property, plant and equipment 786 Other intangible assets 124 Other financial assets 3,369 Deferred tax assets 462 Total non-current assets 4,741 Impairment to fair value less costs of disposal (1,474) Total assets 10,735 31 December 2022 Liabilities Current liabilities Accounts payable 394 Other liabilities 4,031 Total current liabilities 4,425 Non-current liabilities Deferred tax liabilities 413 Total non-current liabilities 413 Total liabilities 4,838 Other disposals of subsidiaries Information on other transactions for the sale of shares in subsidiaries is presented below. Sale of SFH Invest S.A. – On 24 March and 20 May 2022, the Group sold to a third party (the “Buyer”) 90% and 10% of the shares of SFH Invest S.A. (the “ Company ” ), respectively. As a result of the company’ s disposal, the Group ’ s assets decreased by RUB 13,875 million, the Group ’ s liabilities decreased by RUB 62 million, the increase in non-controlling interests, additional capital and other comprehensive income amounted to RUB 891 million, RUB 591 million and RUB 336 million, respectively. А t the same time the Group reflected loans previously issued to the Company and loans previously received from the Company, in the amount of RUB 19,037 million and RUB 5,580 million, respectively, as well as accounts receivable and payable on interest in the amount of RUB 2,295 million and RUB 12 million, respectively. According to the terms of the call option agreement, a number of actions of the Buyer in relation to the sold company were subject to prior consent of the Group. Starting from July 2022, the Group has no agreements granting the right to repurchase any shares of the Company. SISTEMA PJSFC AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (amounts in millions of Russian Rubles, unless otherwise stated) 26 6. BUSINESS COMBINATIONS Acquisitions of businesses are accounted for using the acquisition method, with the identifiable assets acquired and the liabilities assumed recognised at their fair value at the acquisition date. Goodwill is measured as the excess of the sum of the consideration transferred, the amount of any non-controlling interests in the acquiree, and the fair value of the acquirer ’ s previously held equity interest in the acquiree (if any) over the net of the acquisition-date amounts of the identifiable assets acquired and the liabilities assumed. If, after reassessment, the net of the acquisition-date amounts of the identifiable assets acquired and liabilities assumed exceeds the sum of the consideration transferred, the amount of any non-controlling interests in the acquiree and the fair value of the acquirer’s previously held interest in the acquiree (if any), the excess is recognised immediately in profit or loss as a bargain purchase gain. Those interests of non-controlling shareholders that are present ownership interests entitling their holders to a proportionate share of net assets upon liquidation may initially be measured at fair value or at the non- controlling interests’ proportionate share of the fair value of the acquiree’s identifiable net assets. The choice of measurement is made on an acquisition-by-acquisition basis. If the initial accounting for a business combination is incomplete by the end of the reporting period in which the acquisition occurs, the Group reports in its consolidated financial statements provisional amounts for the items for which the accounting is incomplete. During the measurement period, which could be up to one year from the acquisition date, the Group retrospectively adjusts the provisional amounts recognised at the acquisition date to reflect new information obtained about facts and circumstances that existed as at the acquisition date. Business combinations in 2022 The business combinations which took place in 2022 is summarized below: Principal Date of Interest Share after Acquiring Conside- Acquiree activity acquisition acquired acquisition segment ration Etalon Development May 19% 48,8% Corporate 24,035 Gulfstream Security Services April 58% 58% MTS 1,999 VisionLabs IT Developer February 77% 100% MTS 5,465 YIT Development May 100% 100% Etalon Group 1,923 Bronevik Hotel booking services July 100% 100% MTS 4,000 Webinar Video conferencing communications July 75.5% 75.5% MTS 2,095 Fishing industry companies Fishing and fish processing July - December Other 6,452 Other acquisitions Other Other 3,986 Total 49,955 SISTEMA PJSFC AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (amounts in millions of Russian Rubles, unless otherwise stated) 27 Obtaining control over Etalon Group In May 2022, the Group acquired 72.85 million GDRs of the Etalon Group for RUB 4.5 billion. As a result of this transaction, the effective share of the Group in the authorized capital of Etalon Group amounted to 48.8%. The Group concluded that it had gained control over the Etalon Group, taking into account the dispersion of the ownership interests of other shareholders. The following table summarises the amounts of the assets acquired and liabilities assumed relating to such acquisitions at the acquisition date: Etalon Total consideration satisfied by: Cash consideration 4,491 Fair value of the previously held interst in the acquiree 19,544 24,035 Recognised amounts of identifiable assets acquired and liabilities assumed: Property, plant and equipment 5,323 Right-of-use assets 7,896 Deferred tax assets 8,047 Other non-current assets 6,160 Inventories 144,941 Contract assets 22,738 Accounts receivable 8,748 Advances paid and prepaid expenses 12,549 Other taxes receivable 7,598 Cash and cash equivalents 42,577 Other current assets 1,566 Loans and borrowings non-current (74,292) Lease liabilities (7,896) Deferred tax liabilities (15,293) Other financial liabilities (18,767) Other non-current liabilities (545) Loans and borrowings current (11,972) Accounts payable (27,407) Other taxes payable (5,572) Contract liabilities and other liabilities (15,226) Other current liabilities (464) Net assets 90,709 Non-controlling interests (46,443) Bargain purchase gain (20,231) The excess of the consideration transferred over the value of the identifiable assets acquired and liabilities assumed in the amount of RUB 20.2 billion was caused by the low level of market shares quotations, and was recognized in “ Other income ” . As at 21 December 2022, The Group, with the involvement of an independent appraiser, completed the assessment of the fair value of the acquired assets and liabilities. Non-controlling interest was measured at the present ownership instruments’ proportionate sha re in the recognised amounts of the acquiree’s identifiable net assets. . SISTEMA PJSFC AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (amounts in millions of Russian Rubles, unless otherwise stated) 28 The following table summarizes the amounts of the other identifiable acquired assets and liabilities at the acquisition date, except for Etalon: Gulfstream VisionLabs YIT Bronevik Webinar Fishing industry companies Other acquisitions Total consideration satisfied by: Cash consideration 1,999 3,828 1,923 4,000 2,095 1,380 910 Fair value of the previously held - - - - - - - interest in the acquiree - 357 - - - - 2,083 Deferred payment - 659 - - - 5,072 - Fair value of financial assets - - - - - - 993 Fair value of contingent consideration - 621 - - - - - 1,999 5,465 1,923 4,000 2,095 6,452 3,986 Recognised amounts of identifiable assets acquired and liabilities assumed: Property, plant and equipment 279 81 371 8 12 1,641 8,567 Right-of-use assets - - - - - - 79 Customer base 2,114 2,333 - - - - - Other intangible assets 332 736 192 38 452 7,555 952 Other non-current assets 289 31 1,619 41 84 6 19 Inventories - - 8,314 - - 209 2,635 Cash and cash equivalents 24 326 2,456 197 58 234 280 Other current assets 2,609 319 10,480 1,266 57 352 2,934 Loans and borrowings - - (3,951) - - (483) (5,962) Put option to purchase NCI (1,877) - - - (986) - - Lease liabilities - - - - - - (79) Non-current liabilities (605) (774) (578) (32) (4) (313) (44) Current liabilities (3,055) (816) (4,747) (1,416) (187) (216) (5,481) Net assets 110 2,236 14,156 102 (514) 8,985 3,900 Non-controlling interests - - (195) - - (2,666) 11 Goodwill 1,889 3,229 - 3,898 2,609 133 289 Bargain purchase gain - - (12,038) - - - (214) SISTEMA PJSFC AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (amounts in millions of Russian Rubles, unless otherwise stated) 29 The excess of the consideration transferred over the value of the identifiable assets acquired and liabilities assumed was allocated to goodwill mainly arising from the following: Gulfstream Expected synergy effect VisionLabs Expected synergy effect Bronevik Expected synergy effect Webinar Expected synergy effect Fishing industry companies Expected synergy effect Other Expected synergy effect and development of new competencies Acquisition of VisionLabs – In February 2022, the Group acquired a 77% ownership interest in VisionLabs B.V. (“ VisionLabs ” ), leading provider of computer vision and machine learning solutions. The acquisition is aimed at reinforcement of the Group’s artificial intelligence product portfolio in the computer vision space, and enhancing the potential of the Group’s digital ecosystem. The purchase price for total consideration of RUB 5,464 million constitutes a cash payment of RUB 3,828 million, deffered consideration of RUB 659 million, the previously held interest of RUB 357 million and contingent consideration of RUB 621 million. Contingent consideration is based on certain performance criteria for the periods starting 2022 and ending 2024. As at 31 December 2022, the Group, with the involvement of an independent appraiser, completed the assessment of the fair value of the acquired assets and liabilities. Acquisition of Gulfstream – In April 2022, the Group acquired a 58.38% ownership interest in Gulfstream Security Systems JSC (“ Gulfstream ”), one of Russia’s leading providers of digital safeguard systems for residential households, and commercial real estate, for total consideration of RUB 1,999 million in cash. The acquisition is aimed at expanding the Group’s smart home services. The Group obtained call and put options to purchase the remaining 41.62% stake, exercisable starting 2025 based on the financial results of Gulfstream. As at 31 December 2022, the Group has not completed the fair value measurement of the acquired assets and liabilities and the purchase price allocation. The Group recorded the estimated amounts of the acquired identifiable assets, determined, among other inputs, based on the carrying value at the date of acquisition. Acquisition of YIT – In May 2022, the Group acquired controlling interests in certain legal entities representing the Russian business of YIT Corporation (“ YIT Russia ” ) for the consideration of RUB 1,923 million in cash. YIT Russia focuses on mid-market residential real estate and operates several housing-service companies. The excess of the consideration transferred over the value of the identifiable assets acquired and liabilities assumed in the amount of RUB 12,038 million was recognised in “ Other income ” , which was due to the fact that the seller made the sale in an accelerated manner. As at 31 December 2022, The Group, with the involvement of an independent appraiser, completed the assessment of the fair value of the acquired assets and liabilities. Acquisition of Bronevik – In July 2022, the Group acquired a 100% ownership interest in LLC “ Company Bronevik ” and LLC “ Bronevik Online ” (together – “Bronevik”), one of the market leaders in online hotels booking. The acquisition was aimed at developing the Group ’ s tourism services. Total consideration of RUB 4,000 million was paid in cash. SISTEMA PJSFC AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (amounts in millions of Russian Rubles, unless otherwise stated) 30 As at 31 December 2022, the Group has not completed the fair value measurement of the acquired assets and liabilities and the purchase price allocation. The Group recorded the estimated amounts of the acquired identifiable assets, determined, among other inputs, based on the carrying value at the date of acquisition. Acquisition of Webinar – In July 2022, the Group acquired a 75.5% ownership interest in LLC “Webinar ” and LLC “ Webinar Technologies ” (together – “Webinar”), developer and provider of videoconferencing solutions and video services for corporations, for total consideration of RUB 2,095 million in cash. The acquisition was aimed at complementing the Group ’ s ecosystem of B2B services and development of a single universal application for video calls and conferences further integrated with videoconferencing services. The Group has acquired call and put options to purchase the remaining 24.5% stake. In September 2022, options were partly excercised for RUB 328 million and the Group’ s ownership interest in Webinar increased to 84.25%. The remaining put and call options are exercisable in 2024 and 2025 based on the financial results of Webinar. As at 31 December 2022, the Group has not completed the fair value measurement of the acquired assets and liabilities and the purchase price allocation. The Group recorded the estimated amounts of the acquired identifiable assets, determined, among other inputs, based on the carrying value at the date of acquisition. Acquisition of fishing industry companies – During 2022, the Group acquired: 100% stake in Loyd-Fish LLC for RUB 4,929 million. The purchase price includes deferred consideration in the amount of RUB 4,929 million, which was paid in cash in January 2023. 100% stake in Loyd-Auto LLC for RUB 143 million. The purchase price includes deferred consideration in the amount of 143 million rubles, which was paid in cash in January 2023. 75% stake in LLC “ Crystal Fish ” for RUB 1,125 million in cash. 10% stake in Hangar LLC for RUB 255 million in cash. At the same time, the Group entered into an Option agreement to purchase 80% stake in Hangar LLC, during 2022 the Group exercised it and acquired an additional 80% stake in Hangar LLC. These companies specialize in the fishing and processing of red fish on the west coast of the Kamchatka Peninsula and are integrated into a Group-controlled fishing holding with its own fishing and processing of Pacific salmon. As at 31 December 2022, the Group has not completed the assessment of the fair value of the acquired assets and liabilities and the purchase price allocation, the Group recorded the estimated amounts of the acquired identifiable assets, determined, among other inputs, based on the carrying value at the date of acquisition. The consolidated statement of profit and loss for 2022 includes RUB 66,768 million revenue and RUB 7,845 million net profit of the acquired companies, starting from the dates of their acquisition. If the acquisitions had been made at the beginning of the reporting period , the Group ’ s revenue and net profit would have amounted to RUB 942,464 million and RUB 45,258 million, respectively. SISTEMA PJSFC AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (amounts in millions of Russian Rubles, unless otherwise stated) 31 Business combinations in 2021 The business combinations which took place in 2021 are summarized below: The following table summarizes the amounts of the identifiable assets acquired and liabilities assumed relating to such acquisitions at the acquisitions date: Principal Date of Interest Acquiring Purchase Acquiree activity acquisition acquired segment price MTT Telecomunications June 100% MTS 5,798 GreenBush Telecomunications June 100% MTS 5,200 Other acquisitions of MTS Telecomunications April 100% MTS 3,161 Binnopharm Group Pharmaceuticals June n/a Other 38,343 Inter Forest Rus Timber procurement December 100% Segezha 38,748 Novoeniseysky wood-chemical complex Timber procurement September 100% Segezha 3,708 Zarya Fishing July 49% Other 3,000 Acquisitions of Medsi Healthcare December 100% Medsi 2,118 Other acquisitions Other July-August Other 3,574 Итого 103,650 Green Bush Other acquisitions of MTS Binno- pharm Group Novoeniseysky wood-chemical complex Other acquisitions Total consideration satisfied by: Cash consideration 5,200 1,512 - 3,708 3,574 Fair value of the previously held interest in the acquiree - 1,582 38,343 - - Deferred payment - 7 - - - Fair value of financial assets - - - - - Fair value of contingent consideration arrangement - 60 - - - 5,200 3,161 38,343 3,708 3,574 Recognised amounts of identifiable assets acquired and liabilities assumed: Property, plant and equimpment 5,171 623 13,296 4,058 1,655 Right-of-use assets - - 403 4,923 679 Other intangible assets 1 360 20,783 - 1,000 Other non-current assets 17 43 988 929 54 Inventories - - 8,360 1,250 1,587 Other current assets 93 1,590 10,082 746 2,376 Current liabilities (26) (736) (14,326) (1,315) (5,515) Lease liabilities - (118) (389) (1,837) (592) Non-current liabilities (56) - (8,942) (1,224) (468) Net assets 5,200 1,762 30,255 7,530 776 Non-controlling interest - - (14,746) - 13 Goodwill - 1,399 22,834 - 2,853 Bargain purchase gain - - - (3,822) (68) 2021 SISTEMA PJSFC AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (amounts in millions of Russian Rubles, unless otherwise stated) 32 The following table summarizes the amounts of the identifiable assets acquired and liabilities assumed relating to such acquisitions at the acquisitions date: Preliminary valuation Adjust- ments Final valuation Preliminary valuation Adjust- ments Final valuation Preliminary valuation Adjust- ments Final valuation Preliminary valuation Adjust- ments Final valuation Total consideration satisfied by: Cash consideration 3,680 - 3,680 16,951 (26) 16,925 3,000 - 3,000 2,131 (13) 2,118 Fair value of the previously held interest in the acquiree - - - - - - - - - - - - Deferred payment 160 - 160 21,797 26 21,823 - - - - - - Fair value of financial assets 1,958 - 1,958 - - - - - - - - Fair value of contingent consideration arrangement - - - - - - - - - - - - 5,798 - 5,798 38,748 - 38,748 3,000 - 3,000 2,131 (13) 2,118 Recognised amounts of identifiable assets acquired and liabilities assumed: Property, plant and equimpment 588 821 1,409 23,490 (7,525) 15,965 756 518 1,274 232 252 484 Right-of-use assets 114 - 114 28,731 14,956 43,687 - - - 956 - 956 Other intangible assets 1,947 (737) 1,210 557 (540) 17 5,985 (1,043) 4,942 8 1,091 1,099 Other non-current assets 140 - 140 771 (515) 256 - - - - - - Inventories - - - 8,031 (1,663) 6,368 633 (189) 444 67 1 68 Other current assets 3,396 - 3,396 5,375 (143) 5,232 19 10 29 423 2 425 Current liabilities (2,656) - (2,656) (8,557) 1,364 (7,193) (3,388) 3,042 (346) (174) 5 (169) Lease liabilities - - - (8,270) (2,735) (11,005) - - - (957) (2) (959) Non-current liabilities (715) (23) (738) (11,380) (3,199) (14,579) (367) (328) (695) - - - Net assets 2,814 61 2,875 38,748 - 38,748 3,638 2,010 5,648 555 1,349 1,904 Non-controlling interest - - - - - - (638) (2,303) (2,941) - - - Goodwill 2,984 (61) 2,923 - - - - 293 293 1,576 (1,362) 214 Bargain purchase gain - - - - - - - - - - - - 2021 МТТ Inter Forest Rus Zarya Acquisitions of Medsi SISTEMA PJSFC AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (amounts in millions of Russian Rubles, unless otherwise stated) 33 The excess of the consideration transferred over the value of the identifiable assets acquired and liabilities assumed was allocated to goodwill mainly arising from the following: МТТ Expected synergy effect Other acquisitions of MTS Expected synergy effect Binnopharm Skilled workforce, ability to develop new medicine Others Expected synergy effect and development of new competencies Acquisition of MTT – In June 2021, MTS acquired a 100% ownership interest in OJSC Multiregional TransitTelecom (MTT), a provider of intelligent connectivity solutions for businesses, to expand its connectivity services portfolio. The purchase price constituted a cash payment of RUB 3,680 million paid in June 2021, transfer of financial assets offset against the purchase price of RUB 1,958 million and contingent consideration of RUB 160 million. As at 31 December 2021, the Group ’ s consolidated financial statements reflected the allocation of the purchase price based on a preliminary fair value assessment of the assets acquired and liabilities assumed. In 2022 the Group finalized the valuation of assets of MTT and the fair value of the assets changed since the preliminary calculations made at the acquisition date. Acquisition of GreenBush – In June 2021, MTS acquired a 100% ownership interest in LLC GDTs Energy Group (GreenBush), the operator of the GreenBush data center in Technopolis special economic area, to use the facility’ s additional capacity to offer colocation and cloud solutions to customers as well as to facilitate the Group’ s own compute and storage needs. The purchase price constituted a cash payment of RUB 5,200 million paid in July 2021. Binnopharm Group Incorporation of a pharmaceutical holding company – In February 2021, the incorporation of a pharmaceutical holding company, Binnopharm Group was completed. In order to set up a single pharmaceutical holding, Sistema and the Bank, have contributed a 56.2% stake in Sintez OJSC (including Biocom GSC) to the capital of Binnopharm Group. At the same time, Sistema, the Bank, and a consortium of investors comprising the Russian Direct Investment Fund (RDIF), the Russia-China Investment Fund (RCIF) established by the RDIF and China Investment Corporation, and leading Middle Eastern funds, contributed an 85.6% stake in Alium JSC (which includes Binnopharm JSC) to the capital of Binnopharm Group. As a result, the effective share of Sistema together with Bank in the holding company amounted to 79%, and the Consortium of Investors – 15.8%. The remaining 5.2% of the shares were distributed among the minority shareholders-individuals. The Group continued to account for investments in Ristango Holding Limited and Sinocom Investments Limited (holding companies through which investments in JSC “ Alium ” and OJSC “ Sintez ” were made) under equity method. Acquisition of stake in OJSC Sintez (hereinafter – Sintez) – In March 2021, Sistema (through a subsidiary Sistema Telecom Assets LLC) purchased a stake of 32.39% of the authorized capital of Sintez from the Holding Company Nacimbio controlled by State Corporation Rostec. The transaction amounted to RUB 6.9 billion. In May 2021, Sistema contributed the stake in OJSC Sintez acquired from the Holding Company Nacimbio to the capital of Binnopharm Group, as a result of which the share of Binnopharm Group in OJSC Sintez amounted to 88.6%. SISTEMA PJSFC AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (amounts in millions of Russian Rubles, unless otherwise stated) 34 Increase of stake in Ristango Holding Limited – In April 2021 , the Group purchased a stake of 3.95% of the authorized capital of Ristango Holding Limited from minority shareholders for RUB 1.2 billion. Obtaining control over Binnopharm Group – On 25 June 2021, amended and restated Shareholder Agreement was signed between the members of Ristango Holding Limited, as a result of which the Group has obtained control over the operating activities of Ristango Holding Limited, the owner of 100% of the authorized capital of Binnopharm Group. For the period from 1 January 2021 until the date of acquisition of control over Ristango Holding Limited by the Group, the amount of profit from the revaluation of financial instruments in relation to the partners’ participation interests in Ristango Holding Limited amounted to RUB 5.5 billion. After control was obtained, these financial assets were derecognised and financial liabilities in the amount of the present value of the redemption amount were recognized as part of other financial liabilities, which resulted in an effect of RUB 8.2 billion, RUB 5.9 billion and RUB 13.9 billion on accumulated loss, additional capital and non-controlling interests, respectively. As a result of the transaction, the umbrella brands “ Alium ” and “ Sintez ” were identified. These intangible assets are expected to have indefinite lives based on their history and the Group’ s plans to continue to support and build the acquired brands. Sale of stake in Ristango Holding Limited to Nevsky Property Limited – On 28 June 2021, Sistema Telecom Assets LLC, a 100% subsidiary of Sistema, sold an 11.2% stake in Ristango Holding Limited to Nevsky Property Investments Limited for RUB 7 billion. The transaction was recognized directly in equity (Note 7). Exercise of the contract to acquire the Bank ’ s share in Ristango Holding Limited – In July 2021, the Group exercised its right under the forward agreement with the Bank and early purchased VTB ’ s 20.97% share in Ristango Holding Limited for RUB 6.7 billion. Exercise of the contract to acquire the Bank ’ s share in Sinocom Investments Limited – In December 2021, Sistema Telecom Assests LLC, a 100% subsidiary of Sistema, exercised its right to acquire the Bank’ s shares of Sinocom Investments Limited, which owns shares of Ristango Holding Limited, for the amount of RUB 9.06 billion. As a result of the transaction, the effective share of the Corporation in Binnopharm Group increased to 75.3%. As at 31 December 2021, the Group, with the involvement of an independent appraiser, completed the assessment of the fair value of the acquired assets and liabilities. Acquisition of LLC Inter Forest Rus and its subsidiaries – On December 28, 2021, the Group acquired 100% control over LLC Inter Forest Rus and its 24 subsidiaries from a third party, including four sawmills, plywood and pellet manufacturers, as well as logging assets with an estimated cutting area of about 10.9 million cubic meters. All acquired assets are located in the Krasnoyarsk Region and the Irkutsk Region. The purchase price includes a cash payment of USD 528 million (RUB 38,748 million at the transaction date exchange rate), of which USD 230 million (RUB 16,951 million at the transaction date exchange rate) was paid during 2021, RUB 18,390 million the Group paid in January-March 2022. SISTEMA PJSFC AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (amounts in millions of Russian Rubles, unless otherwise stated) 35 As at 31 December 2021, deferred payments in the total amount of USD 50 million (RUB 3,715 million at the exchange rate as at 31 December 2021), included in long-term other financial liabilities from the acquisition of companies, are payable in equal amounts in 2 and 4 years from the date of signing of the sale and purchase agreement, but not discounted, since act as security against possible property losses of the Group related to the decisions of the previous owners (Note 27). The security covers, among other things, the risks of loss of property, additional taxes, penalties and fines, disposal of allowable forest cut. On 29 December 2022, the Group got notice regarding partial discharge of deferred payment in the amount of USD 47.5 million (equivalent to RUB 3,386 million at the exchange rates effective on the agreement date) recognized as “ Other expenses ” in the consolidated statement of profit or loss and other comprehensive income. In preparing the consolidated financial statements for 2022, the Group has completed the fair value measurement of acquired assets and liabilities with the involvement of an independent appraiser, as a result the comparative information as at 31 December 2021 was adjusted. Consolidation of CJSC Novoyeniseysky wood-chemical complex – On 15 February 2021, the Group submitted an application to participate in an auction held by the bank of non-core assets “ Trust ” to sell assets related to CJSC Novoyeniseysky wood-chemical complex (NLHK). NLHK is one of the largest closed-cycle woodworking enterprises located in the Lesosibirsk, Krasnoyarsk Region, specializing on the lumber production, dispersed wood fraction, chipboard, pellets, as well as joinery for the construction of residential and industrial premises. The auction lot included the bank’ s rights to claims on loans and other liabilities in the total amount of RUB 11.5 billion in different currencies, as well as the right to enter into an option for 71% of NLHK shares, the condition for the exercise of which was, among other things, the termination of arbitration proceedings in the bankruptcy proceedings against NLHK. The Group purchased the lot for a cash consideration of RUB 2,306 million paid in February 2021. On 20 May 2021, the Group signed an agreement to acquire a minority interest of 29% of NLHK shares. The transaction was completed on 27 July 2021, the shares became the property of the Group’ s subsidiar y, JSC Lesosibirsky LDK No1. The total remuneration amounted to USD 17 million (RUB 1.2 billion), of which RUB 620 million was paid on 8 June 2021, the remaining amount RUB 601 million was due after the transfer of ownership, and was paid on 19 August 2021. On 15 September 2021, the Arbitration Court of the Krasnoyarsk Region decided to terminate the bankruptcy proceedings in relation to NLHK, and the option to acquire 71% of the shares became exercisable, and, accordingly, the Group obtained control over operating activities and consolidated 100% of the assets and liabilities of NLHK. As a result of the acquisition of NLHK, the Group received gain from the acquisition in the amount of RUB 3,822 million, which was recognized as part of “ Other income ” in the с onsolidated statement of profit or loss and other comprehensive income. The gain is related to the bankruptcy proceedings against NLHK, initiated as a result of a corporate conflict between the previous owners of the company. As a result of this conflict, NLHK ’ s potential in terms of both harvesting volumes and sawn timber production volumes was not fully utilized. In the 4th quarter 2021, having terminated the bankruptcy procedure, as well as having ensured a sufficient level of working capital, the Group, without additional capital investments, increased the volumes of logging and production of sawn timber, increasing the operating profitability of the company. SISTEMA PJSFC AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (amounts in millions of Russian Rubles, unless otherwise stated) 36 In preparing the consolidated financial statements for 2022, the Group has completed the fair value measurement of acquired assets and liabilities with the involvement of an independent appraiser, as a result the comparative information as at 31 December 2021 was adjusted Acquisitions of Medsi – In December 2021, the Group acquired the Dialine clinic chain in Volgograd (DIALINE Clinical Diagnostic Laboratory LLC and DIALINE Multidisciplinary Medical Center LLC), as well as the Promedicine clinic chain in Ufa (“ MMC “ Clinic of Allergology and Pediatrics ” LLC, “ KNTS ” LLC, “ MC ” Preventive Medicine ” LLC, “ MMC ” Preventive Medicine ” LLC and “ Preventive Medicine-Pharm ” LLC). Part of the consideration for the Promedicine chain in the amount of RUB 973 million was paid by transfer under a letter of credit. As at 31 December 2021, the Group recorded the letter of credit as restricted cash. The Group recorded other payables for the acquisition of the Promedicine chain and the Dialine chain in the amount of RUB 1,023 million and RUB 56 million, respectively. At the beginning of 2022, the Group repaid the debt on the acquisition of the Dialine and Promedicine clinic chain. Payments in the reporting period were adjusted downward by RUB 13 million and amounted to RUB 94 million according to the terms of the contracts, due to the consideration clarification of the acquired assets. In preparing the consolidated financial statements for 2022, the Group has completed the fair value measurement of acquired assets and liabilities with the involvement of an independent appraiser, as a result the comparative information as at 31 December 2021 was adjusted. Acquisition of Zarya – In July 2021, the Group acquired a 49% stake in LLC Zarya for RUB 3 billion. The main activity of the company is fish production. The Group and other participants entered into a shareholder agreement, according to which the Group received control over operating activities. In December 2021, the Group acquired an additional 41% stake in the authorized capital for RUB 3.2 billion. As a result of the transaction, the share of the Group in this subsidiary increased to 90%. In preparing the consolidated financial statements for 2022, the Group has completed the fair value measurement of acquired assets and liabilities with the involvement of an independent appraiser, as a result the comparative information as at 31 December 2021 was adjusted. Non-controlling interest was measured at the present ownership instruments’ proportionate share in the recognised amounts of the acquiree’ s identifiable net assets. The following table summarises the details of purchase of subsidiaries, net of cash acquired, reported in the consolidated statements of cash flows: 2022 2021 Cash consideration 21,285 39,756 Net of cash acquired (46,152) (3,603) Payments for acquisitions of past periods (Note 27) 18,643 - Acquisitions of subsidiaries less cash acquired (6,224) 36,153 SISTEMA PJSFC AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (amounts in millions of Russian Rubles, unless otherwise stated) 37 7. CAPITAL TRANSACTIONS OF SUBSIDIARIES The Group enters into transactions to acquire or dispose ownership interests in its existing subsidiaries that do not result in the Group losing control over the subsidiaries. Also, the entities of the Group enter into transactions with each other to transfer ownership interests in subsidiaries within the Group. Such transactions are accounted for as equity transactions. The carrying amounts of the Group’ s interests and the non-controlling interests ( “ NCI ” ) are adjusted to reflect the changes in their relative interests in the subsidiaries. Any difference between the amount by which the non- controlling interests are adjusted and the fair value of the consideration paid or received is recognised directly in equity in additional paid-in capital ( “ APIC ” ) and attributed to shareholders of the Company. Transactions in 2022 The information on capital transactions of subsidiaries which took place in 2022 and their impacts on the Group’ s equity is summarised below: (Decrease)/ Increase of Increase of additional non-controlling paid-in capital interests The effect of changes in ownership percentage in subsidiaries (1,706) 367 Other 7 179 Total impact (1,699) 546 Transactions in 2021 The information on capital transactions of subsidiaries which took place in 2021 and their impacts on the Group’ s equity is summarised below: (Decrease)/ (Decrease)/ increase of increase of additional non-controlling paid-in capital interests Purchase of own shares by MTS (3,239) (10,541) Initial Public Offering of Segezha Group 19,540 10,399 Sale of stake in Ristango Holding Limited to Nevsky Property Investments Limited (Note 6) 3,313 3,388 Sale of stake in Segezha Group 6,738 4,300 Other (2,292) 3,364 Total impact 24,060 10,910 Purchase of own shares by MTS – In 2021, MTS acquired 65,308,610 ordinary shares, including acquisition of 22,796,040 ordinary shares from Sistema PJSFC and Sistema Finance S.A., the subsidiary of the Group, in the amount of RUB 7.5 billion. SISTEMA PJSFC AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (amounts in millions of Russian Rubles, unless otherwise stated) 38 Initial Public Offering of Segezha Group – On 28 April 2021, Segezha Group carried out an initial public offering of 3.75 billion ordinary shares on the Moscow Exchange. As a result, Segezha Group has raised RUB 30 billion. The amount of expenses directly related to the issue and placement of shares amounted to RUB 1 billion. Subsequently, Sistema has exercised the option for additional placement of secondary shares as part of the initial public offering and listing of ordinary shares of Segezha Group on the Moscow Exchange. The total amount of Sistema’ s proceeds from the exercise of the option for the additional placement is approximately RUB 0.8 billion. Sale of a stake in Segezha Group – In December 2021, Sistema sold a 8.7% stake in ordinary shares of PJSC Segezha Group for USD 150 million (RUB 11 billion) . 8. REVENUE Revenue from contracts with customers specific to the reporting segments of the Group is recognised in the following way. MTS – Revenue for access charges, voice and video calls, rendering of cloud services, messaging, interconnect fees and fixed and mobile broadband is recognised as services are rendered. This is based upon either usage (minutes of traffic processed, volume of data transmitted) or passage of time (monthly subscription fees). Products and services may be sold separately or in bundle packages. The most significant part of revenue relates to prepaid contracts. The Group capitalizes costs of obtaining contracts (such as sales commissions) and costs of fulfilling contracts and amortises over the period expected to benefit from the contract. The Group used the practical expedient allowed by of IFRS 15 whereby such costs may be expensed if the amortisation period is one year or less. Revenue from sales of goods (mainly mobile handsets, other mobile devices, software licenses) is recognised when the significant risks and rewards of ownership have been transferred to the customer. Revenue from providing financial services mainly relates to interest bearing assets of MTS Bank. Such revenue is recognised on an accrual basis using the effective interest method. Medsi – Medsi recognises revenue from the provision of medical services when (or to the extent that) it fulfills the performance obligation by transferring the promised good or service to the buyer. An asset is transferred when (or as) the buyer gains control of the asset. The Group provides medical services under contracts for payment upon the provision of services and from advance contracts. Under contracts that provide for payment upon the provision of services, the Group fulfills the performance obligation at a certain point in time. Revenue is recognised at the time when the service is rendered in full. Revenue from advance contracts (concluded in the usual practice for 1 year) that provide for the customer’ s right to receive a certain package of services during the term of the contract is recognised on a straight-line basis over the entire term of the contract. SISTEMA PJSFC AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (amounts in millions of Russian Rubles, unless otherwise stated) 39 In most cases, fitness services are provided on the basis of an advance payment form and are also recognised on a straight-line basis over the entire term of the contract. As medical examination reports on services rendered to insurance companies are received with some delay, the Group recognises revenue less the provision for services rendered unwarranted, which is estimated based on historical data. Segezha Group – Segezha Group receives revenue from the sale of goods (paper and packaging, lumber, plywood and other goods) and from the provision of finished goods delivery services to the buyer after the transfer of control over the goods. Sales are recognised at the time when control of goods is transferred, i.e. when the goods are delivered to the buyer in accordance with the terms of delivery (Incoterms 2010), the buyer has complete freedom of action with respect to the goods and when there is no unfulfilled obligation that may affect the acceptance of the goods by the buyer. Delivery is deemed to have been made when the goods have been delivered to a certain place, the risks of damage and loss passed to the buyer, and the buyer accepted the goods in accordance with the contract, the validity of the acceptance provisions has expired or the Group has objective evidence that all acceptance terms have been met. Etalon – Etalon recognises revenue when (or as) it transfers control over an asset to a customer. Control of an asset refers to the ability to direct the use of, and obtain substantially all of the remaining benefits from, the asset. Transfers of control may vary depending on the individual terms of the sales contracts. The Group builds and sells residential real estate under long– term contracts with buyers (contracts under IFRS 15). Such contracts are concluded at the stage of construction of residential facilities. According to the terms of the contracts, the Group does not have the right to transfer real estate to another customer and to be paid for the work performed, and, consequently, revenue is recognized over a period of time. To recognize revenue over a period of time, the Group evaluates the degree of fulfillment of obligations using the resource method, determining the percentage of completion as the share of actual costs incurred in the total estimated costs of fulfilling obligations under contracts (the cost of a real estate object under construction). Revenue from contracts under IFRS 15 is recognized after the commissioning of real estate objects, at the time of transfer of control to customers. Control over such agreements is usually transferred after the signing of the sale and purchase contract. SISTEMA PJSFC AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (amounts in millions of Russian Rubles, unless otherwise stated) 40 The following is analysis of the Group’ s revenue from continuing operations for 2022: MTS Segezha Etalon Medsi Corporate Other Total Type of goods/services Connectivity services 419,942 - - - - - 419,942 Sale of goods 43,731 - - - - - 43,731 Production - 106,728 - - - 111,717 218,445 Development - - 51,966 - - - 51,966 Financial services 62,731 - - - - - 62,731 Medical services - - - 35,958 - - 35,958 Other services 10,104 - 414 - 3,297 34,987 48,802 Other - - 7,866 - - 23,215 31,081 536,508 106,728 60,246 35,958 3,297 169,919 912,656 Revenue from goods or services transferred to customers At a point in time 43,731 106,728 13,768 34,516 3,297 159,355 361,396 Over time 492,777 - 46,478 1,442 - 10,564 551,260 536,508 106,728 60,246 35,958 3,297 169,919 912,656 Reportable segments The following is analysis of the Group ’ s revenue from continuing operations for 2021: MTS Segezha Etalon Medsi Corporate Other Total Type of goods/services Connectivity services 401,707 - - - - - 401,707 Sale of goods 68,973 - - - - - 68,973 Production - 92,438 - - - 71,443 163,881 Financial services 46,532 - - - - - 46,532 Medical services - - - 30,040 - - 30,040 Other services 6,487 - - - 3,427 29,484 39,398 Other - - - - - 22,687 22,687 523,699 92,438 - 30,040 3,427 123,614 773,218 Revenue from goods or services transferred to customers At a point in time 68,973 92,438 - 28,714 3,427 116,610 310,162 Over time 454,726 - - 1,326 - 7,005 463,056 523,699 92,438 - 30,040 3,427 123,615 773,218 Reportable segments SISTEMA PJSFC AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (amounts in millions of Russian Rubles, unless otherwise stated) 41 The Group expects to recognize revenue related to performance obligations that were unsatisfied (or partially unsatisfied) as at 31 December 2022 as follows: 2023 2024-2028 2029-2033 Total Mobile and fixed telecommunication services 24,375 1,097 27 25,499 Development 58,440 44,544 - 102,984 Other services 17,995 8,710 1,232 27,937 Loyalty programmes 455 - - 455 Total 101,265 54,351 1,259 156,875 Contract assets and liabilities Contract balances include trade receivables related to the recognised revenue, contract assets and contract liabilities. Trade receivables represent an unconditional right to receive consideration (primarily in cash). Contract assets represent accrued revenues that have not yet been billed to customers due to certain contractual terms other than the payments terms. Contract assets of MTS represent accrued revenue in a bundled offering which combines the sale of a mobile device and the provision of mobile services for a fixed-period. The mobile device is invoiced at a reduced price leading to the reallocation of a portion of amounts invoiced for mobile communication services to the supply of the mobile phone. The excess of the amount allocated to the mobile phone over the price invoiced is recognised as a contract asset and thus transferred to trade receivables as the service is rendered. Contract assets of MTS also relate to the MTS ’ s rights to consideration for work completed but not yet billed for integration services projects. Contract liabilities represent amounts paid by customers to the Group before receiving the goods or services promised in the contract. Contract liabilities consisted of advances received from customers and also amounts invoiced and paid for goods or services that are yet to be transferred. Etalon’ s contract assets are a rights to consideration for work completed but not billed at the reporting date on sale of residential premises and commercial premises under share participation agreements and for long-term construction contracts. Contract assets are transferred to accounts receivable when the rights become unconditional. Payment terms for contracts on the sale of flats and built-in commercial premises under share participation agreements usually include advance payments, payments in installments until the date of completion of construction and payment in arrears of 2 to 5 years after the date of completion of construction for specific projects. Contract liabilities include advance consideration received from customers. SISTEMA PJSFC AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (amounts in millions of Russian Rubles, unless otherwise stated) 42 Due to the nature of its activities, the Etalon receives significant advances from customers (designated as contract liabilities), and makes significant prepayments to sub-contractors and other suppliers. Advances paid are recognised on an undiscounted basis. The Group adjusts contract liabilities for the significant financing component if the timing of payments agreed to by the parties provides the Group with a significant benefit of financing. When adjusting the promised amount of consideration (monetary or non-monetary) for a significant financing component, the Group applies discount rates that would be reflected in a separate financing transaction between the entity and its customer at contract inception that is typically the average mortgage rate for contract assets and the Group’ s incremental borrowing rate for contract liabilities. The following table provides information about receivables, contract assets and contract liabilities from contracts with customers as at 31 December 2022 and 2021: 31 December 2022 31 December 2021 Trade accounts receivable 30,012 33,939 Contract assets 30,149 8,272 Total assets 60,161 42,211 Less: current portion (59,232) (40,070) Total non-current assets 929 2,141 Contract liabilities (39,944) (32,953) Thereof: Mobile telecommunication services (25,499) (22,064) Development (11,627) - Other services (2,363) (10,438) Loyalty programmes (455) (451) Total liabilities (39,944) (32,953) Less: current portion 37,709 31,125 Total non-current liabilities (2,235) (1,828) SISTEMA PJSFC AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (amounts in millions of Russian Rubles, unless otherwise stated) 43 Changes in the contract assets and the contract liabilities balances during the 2022 and 2021 are as follows: Contract assets Contract liabilities Contract assets Contract liabilities Balance as of 1 January 8,272 (32,953) 6,306 (32,395) Revenue recognized that was included in the contract liability balance at the beginning of the period 4,678 34,933 - 26,424 Cash received, excluding amount recognized as revenue during the period - (47,214) 136 (27,355) Transfer to assets held for sale (22,719) - - - Increase as a result of changes in the measure of progress (Note 6) 19,154 - (1,941) 373 Increase in revenue for which no payment was received - - 3,771 - Financing components under IFRS 15 352 (75) - - Discontinued operations (8,859) 22,594 - - Business combinations (Note 6) 29,271 (17,229) - - Balance as of 31 December 30,149 (39,944) 8,272 (32,953) 2022 2021 Cost to obtain and fulfill a contract The Group capitalizes certain incremental costs incurred in acquiring or fulfilling a contract with a customer if the management expects these costs to be recoverable and includes them in other intangible assets and other non-current assets, accordingly. Costs of acquiring a contract include commissions paid to a third-party distributor as well as the associated remuneration of the Group’ s commercial employees for obtaining a contract with a customer. These costs are amortised on a straight-line basis over the average subscriber life. Costs to fulfil a contract mainly relate to costs of equipment transferred to the subscribers required for the provision of services. These costs are amortised on a straight-line basis for the shorter of equipment useful life or average subscriber life. The Group uses a practical expedient from IFRS 15, which allows to expensing of contract costs as incurred when the expected contract duration is one year or less. As at 31 December 2022 and 31 December 2021, the balances of cost to obtain and fulfil contracts capitalized by the Group and represented in consolidated statement of financial position in “ Other assets ” (non-current) amounted to: 31 December 2022 31 December 2021 Cost to obtain contracts 8,393 7,779 Cost to fulfil contracts 2,377 3,155 SISTEMA PJSFC AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (amounts in millions of Russian Rubles, unless otherwise stated) 44 As at 31 December 2022 and 2021 the accumulated amortisation expense related to cost to obtain and fulfill contracts amounted to RUB 9,766 million and RUB 9,015 million, respectively. Amortisation expense related to cost to obtain and fulfill contracts recognised for the year ended 31 December 2022 amounted to RUB 4,457 million (2021: RUB 4,076 million). There was no impairment loss relating to the costs capitalized. 9. IMPAIRMENT OF LONG-LIVED ASSETS Impairment of long-lived assets recognised in the consolidated statement of profit or loss for 2022, includes impairment of property, plant and equipment, investment property, goodwill and other intangible assets. 2022 2021 Reversal of impairment of property, plan and equipment (664) (313) Impairment of intangable assets 1,703 40 Impairment/(reversal of impairment) of other non-current assets 318 (469) Impairment of goodwill (Note 15) 489 139 Total impairment of long-lived assets 1,846 (603) Impairment of property, plant and equipment – In 2021 the Group analyzed the possible impairment indicators of property, plant and equipment and construction-in-progress The Group identified impairment amounted to RUB 130 million relating to Buildings and facilities, Machinery and equipment and other property, plant and equipment of Segezha Sawmills LLC because of production closure. The Group has also accrued impairment amounted to RUB 777 million relating to the detailed design documentation and other capitalized costs because of revised and updated technical parameters of the projects. The Group reversed the provision for property, plant and equipment in the “O the r” segment in the amount of RUB 1,430 million due to improved financial performance. In 2022, previously impaired individual construction-in-progress items were written off with the disposal of accumulated impairment. 10. IMPAIRMENT OF FINANCIAL ASSETS Impairment of financial assets for 2022 and 2021 comprise the following: 2022 2021 Allowance for expected credit losses of accounts receivable 3,147 1,824 Impairment of loans carried at amortised cost (Note 27) 704 1,958 Impairment of other financial assets 330 221 Total impairment of financial assets 4,181 4,003 SISTEMA PJSFC AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (amounts in millions of Russian Rubles, unless otherwise stated) 45 11. INCOME TAXES The Group measures and records its current income tax payable and its tax bases in its assets and liabilities in accordance with the tax regulations of the countries where the Group and its subsidiaries operate, which may differ from IFRS. Deferred taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for tax purposes. Deferred tax assets are not recognised when management believes that it is more than 50% probable that deferred tax assets or some portion of them will not be realized. At the same time, the Group takes into account all available evidence, including projected future taxable profit, tax planning strategies and recent financial transactions. The tax rate used for the reconciliations below is the corporate tax rate of 20% payable by corporate entities in the RF on taxable profits (as defined) under tax law in that jurisdiction. The Group ’ s income tax expense for 2022 and 2021 comprise the following: 2022 2021 Current income tax expense (28,832) (31,589) Deferred income tax benefit/(expense) 1,255 (9,741) Total income tax expense recognised in the current year relating to continuing operations (27,577) (41,330) Income tax expense calculated by applying the Russian statutory income tax rate to income from continuing operations before income tax differs from income tax expense recognised in the consolidated statements of profit or loss as a consequence of the following adjustments: 2022 2021 Profit before tax 68,098 106,321 Income tax expense calculated at 20% (13,620) (21,264) Adjustments due to: Earnings distribution from subsidiaries and associates (6,132) (6,221) (Increase) of unrecognised deferred tax assets (1,493) (11,077) Non-deductible expenses (7,542) (3,843) Different tax rates of subsidiaries 472 600 Non-taxable income 1,142 3,213 Other (404) (2,738) Income tax expense (27,577) (41,330) SISTEMA PJSFC AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (amounts in millions of Russian Rubles, unless otherwise stated) 46 The following is the analysis of deferred tax assets/(liabilities) presented in the consolidated statements of financial position for 2022 and 2021: Recognised Opening in profit Recognised Acquisitions Closing 2022 balance or loss in capital /disposals balance Deferred tax (liabilities)/ assets in relation to: Accrued expenses and accounts payable 9,830 5,438 (8) (10,397) 4,863 Property, plant and equipment (39,124) 1,911 61 (58) (37,210) Intangible assets (11,611) 4,147 - (1,019) (8,483) Cost capitalization (1,830) (86) - - (1,916) Deferred connection fees 1,606 276 - - 1,882 Inventory obsolescence 735 (2,248) 3 3,292 1,782 Allowance for expected credit losses 3,525 1,156 5 1 4,687 Undistributed earnings of subsidiaries and joint ventures and assoсiates (4,356) (1,240) 98 - (5,498) Right-of-use assets 5,028 192 2 (9) 5,213 Tax losses carried forward 21,648 (1,633) 8 1,504 21,527 Debt modification (78) 98 - - 20 Effect of derivatives reclassification 2,045 - (1,100) - 945 Other 1,132 (6,756) 370 3,323 (1,931) Total (11,450) 1,255 (561) (3,363) (14,119) Recognised Opening in profit Recognised Acquisitions Closing 2021 balance or loss in capital /disposals balance Deferred tax assets/ (liabilities) in relation to: Accrued expenses and accounts payable 6,516 643 - 2,671 9,830 Property, plant and equipment (27,351) (1,743) 32 (10,062) (39,124) Intangible assets (8,358) 1,244 - (4,497) (11,611) Cost capitalization (1,668) (162) - - (1,830) Deferred connection fees 1,430 176 - - 1,606 Inventory obsolescence 436 (128) - 427 735 Allowance for expected credit losses 2,676 761 3 85 3,525 Undistributed earnings of subsidiaries and joint ventures and assoсiates (4,436) 166 (86) - (4,356) Right-of-use assets 4,242 789 - (3) 5,028 Tax losses carried forward 32,465 (11,904) 168 919 21,648 Debt modification (123) 52 - (7) (78) Effect of derivatives reclassification - - 2,045 - 2,045 Other 805 365 166 (204) 1,132 Итого 6,634 (9,741) 2,328 (10,671) (11,450) SISTEMA PJSFC AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (amounts in millions of Russian Rubles, unless otherwise stated) 47 As at 31 December 2022 and 2021 the Group reported the following deferred income tax assets and liabilities in the consolidated statements of financial position: 31 December 2022 31 December 2021 Deferred tax assets 43,231 30,956 Deferred tax liabilities (57,350) (42,406) Net deferred tax liabilities (14,119) (11,450) As at 31 December 2022 and 2021, the tax losses carried forward, for which deferred tax assets were recognised, amounted to RUB 107,635 million and RUB 108,238 million, respectively. The Group accrued uncertain income tax positions as a component of income tax payable of RUB 109 million and RUB 160 million as at 31 December 2022 and 2021, respectively. Russian Federal law No401 -FZ dated 30 November 2016 allowed for the indefinite carry forward of tax losses, whereas this was previously restricted to 10 years. Also, the law specified that the tax base for the years 2017-2024 may not be reduced by tax losses carried forward in an amount exceeding 50% of the base. The following table summarizes temporary differences, for which deferred tax assets were not recognised in the consolidated statements of financial position as at 31 December 2022 and 2021: Carry-forward Jurisdiction period 2022 2021 India 2022-2028 59,749 81,463 Russia Unlimited 268,629 305,335 Total 328,378 386,798 12. EMPLOYEE BENEFITS EXPENSES Employee benefits expenses consist of salaries, bonuses and social security contributions. Employee benefits expenses included in cost of sales, selling, general and administrative expenses and result from discontinued operations for 2022 and 2021 comprised RUB 183,688 million and RUB 159,886 million, respectively. SISTEMA PJSFC AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (amounts in millions of Russian Rubles, unless otherwise stated) 48 13. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are stated at historical cost. Cost includes major expenditures for improvements and replacements, which extend useful lives of the assets or increase their revenue generating capacity. Repairs and maintenance, including preventive maintenance, are charged to the consolidated statement of profit or loss as incurred. The cost of major overhauls and replacements, which extend useful lives of the assets or increase their revenue generating capacity, are capitalised to the cost of the assets. After recognition as an asset, an item of property, plant and equipment is carried at its cost less any accumulated depreciation and any accumulated impairment losses. Depreciation for property, plant and equipment is computed under the straight-line method utilizing estimated useful lives of the assets as follows: Buildings 7 – 150 years Leasehold improvements the term of the lease Base stations 3 – 44 years Other network equipment 3 – 20 years Power and utilities up to 60 years Forestry equipment 3-20 years Other up to 15 years Borrowing costs directly attributable to the acquisition, construction or production of qualifying assets, which are assets that necessarily take a substantial period of time to get ready for their intended use or sale, are added to the cost of those assets, until such time as the assets are substantially ready for their intended use or sale. The Group considers a construction period of more than six months to be substantial. Investment income earned on the temporary investment of specific borrowings pending their expenditure on qualifying assets is deducted from the borrowing costs eligible for capitalisation. All other borrowing costs are recognised in profit or loss in the period in which they are incurred. Property, plant and equipment, net of accumulated depreciation and impairment, as at 31 December 2022 and 2021 consisted of the following: 31 December 31 December 2022 2021 Carrying amount Switches, transmission devices, network and base station equipment 229,525 229,958 Buildings and leasehold improvements 108,982 93,938 Power and utilities 32,761 30,854 Forestry equipment 60,110 54,171 Land 26,037 24,153 Other 90,890 81,124 Total 548,305 514,198 SISTEMA PJSFC AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (amounts in millions of Russian Rubles, unless otherwise stated) 49 Switches, transmission devices, Buildings network and and leasehold Power base station improve- and Forestry equipment ments utilities equipment Land Other Total Cost Balance as of 1 January 2021 590,550 113,655 52,326 44,801 22,982 117,050 941,364 Additions 59,927 6,963 4,392 18,544 490 27,047 117,363 Disposals (44,394) (872) (741) (1,043) (5) (6,441) (53,496) Business combinations 1,068 18,099 - 13,894 477 9,488 43,026 Reclassified to assets held for sale (992) (1) - - - (51) (1,044) Currency translation adjustment 1,306 (155) - (243) (32) 74 950 Reclassified from right-of-use assets - - - - 56 1,034 1,090 Sale of companies - - - - - (326) (326) Other (341) 673 - (1,646) 185 3,543 2,414 Balance as of 31 December 2021 607,124 138,362 55,977 74,307 24,153 151,418 1,051,341 Additions 41,687 18,203 4,620 8,813 1,565 28,055 102,943 Disposals (22,082) (1,947) (189) (1,417) (70) (7,425) (33,130) Business combinations 289 4,523 - 6,453 457 4,560 16,282 Reclassified to assets held for sale (584) (4,457) - - - (1,029) (6,070) Currency translation adjustment 937 (835) - (382) (20) (374) (674) Reclassified from right-of-use assets - - - - 51 355 406 Sale of companies - (1,823) - - (102) (13,234) (15,159) Other (1,065) 270 - (5) 3 5,948 5,151 Balance as of 31 December 2022 626,306 152,296 60,408 87,769 26,037 168,274 1,121,090 SISTEMA PJSFC AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (amounts in millions of Russian Rubles, unless otherwise stated) 50 Switches, transmission devices, Buildings network and and leasehold Power base station improve- and Forestry equipment ments utilities equipment Land Other Total Accumulated depreciation and impairment Balance as of 1 January 2021 (371,512) (39,472) (22,433) (15,865) - (64,771) (514,053) Disposals 38,225 572 125 731 - 5,519 45,172 Disposals from sales of subsidiaries - - - - - 255 255 Reclassified from assets held for sale 1,247 1 - - - 15 1,263 Depreciation expense (44,387) (6,367) (2,815) (4,232) - (11,284) (69,085) Currency translation adjustment (1,016) 154 - - - (29) (891) Reclassified from right-of-use assets - - - - - (358) (358) (Impairment)/recovery of impairment - 831 - (835) - 317 313 Other 277 (143) - 65 - 42 241 Balance as of 31 December 2021 (377,166) (44,424) (25,123) (20,136) - (70,294) (537,143) Disposals 21,957 1,364 71 542 - 6,699 30,633 Disposals from sales of subsidiaries - 702 - - - 5,058 5,760 Reclassified to assets held for sale 899 2,845 - - - 1,446 5,190 Depreciation expense (43,211) (4,401) (2,595) (8,783) - (17,286) (76,276) Currency translation adjustment 240 614 - 121 - 767 1,742 Reclassified from right-of-use assets - - - - - (326) (326) (Impairment)/recovery of impairment - 29 - 596 - 39 664 Other 500 (43) - 1 - (3,487) (3,029) Balance as of 31 December 2022 (396,781) (43,314) (27,647) (27,659) - (77,384) (572,785) Advances issued for the acquisition of non-current assets are included in Other assets within non- current assets and amount to RUB 12,718 million and RUB 25,247 million as at 31 December 2022 and 2021, respectively. The decrease is mainly related to the reduction in the advances for the construction of new medical clinics at the reporting date. SISTEMA PJSFC AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (amounts in millions of Russian Rubles, unless otherwise stated) 51 14. INVESTMENT PROPERTY Investment property primarily includes cottages, office and commercial space and business centers owned by the companies of the Group operating in real estate sector, mainly Business Nedvizhimost. Investment property is stated at cost less accumulated depreciation and impairment losses. Depreciation for investment property is recognised using the straight-line method based on the average estimated useful lives of the assets of 25 years. Accumulated depreciation as at 31 December 2022 and 2021 amounted to RUB 6,652 million and RUB 5,735 million, respectively. 2022 2021 Balance at the beginning of the year 13,160 12,649 Reclassified from / (to) property, plant and equipment 207 735 Additions 1,500 914 Disposals (735) (1,547) Depreciation expense (917) (465) As part of disposed companies (4,357) - As part of business combinations 968 - Reclassified from/(to) inventories 3,339 874 Balance at the end of the year 13,165 13,160 In revenue included investment property rental income for 2022 of RUB 3,916 million (2021: 2,570 million). Operating expenses arising from the investment property that generated rental income during 2022 totalled RUB 2,318 million (2021: 1,515 million). In estimating the fair value of the investment property, the Group classified the properties within Level 3 of the fair value hierarchy. As at 31 December 2022 the Group determined the fair values of the investment property at RUB 50,328 million (2021: RUB 48,367 million). The fair values as at 31 December 2022 and 2021 were determined based either on discounted cash flows or by reference to market values of similar properties in the relevant region. The main inputs to the fair value measurement are the post-tax discount rate, revenue growth rates, OIBDA margin and adjustments to market values of similar properties. OIBDA is defined as operating profit, adjusted on depreciation and amortisation. SISTEMA PJSFC AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (amounts in millions of Russian Rubles, unless otherwise stated) 52 15. GOODWILL Goodwill arising on an acquisition of a business is carried at cost recognised at the acquisition date less accumulated impairment losses, if any. The carrying amounts of goodwill attributable to operating segments are as follows: Binno- Segezha Pharm MTS Medsi Steppe Group Group Other Total Balance as of 1 January 2021 Gross amount of goodwill 55,611 700 9,352 710 - 13,460 79,833 Accumulated impairment loss (8,851) (168) - (241) - (13,369) (22,629) 46,760 532 9,352 469 - 91 57,204 Business combinations 4,383 214 2,694 - 22,834 383 30,508 Impairment - (35) - - - (104) (139) Currency translation adjustment 395 - - - - 82 477 Balance as of 31 December 2021 Gross amount of goodwill 60,389 914 12,046 710 22,834 13,925 110,818 Accumulated impairment loss (8,851) (203) - (241) - (13,473) (22,768) 51,538 711 12,046 469 22,834 452 88,050 Business combinations 11,589 15 - - - 443 12,047 Impairment (489) - - - - - (489) Currency translation adjustment 709 - - - - - 709 Other (61) - (34) - - (159) (254) Balance as of 31 December 2022 Gross amount of goodwill 72,626 929 12,012 710 22,834 14,209 123,320 Accumulated impairment loss (9,340) (203) - (241) - (13,473) (23,257) 63,286 726 12,012 469 22,834 736 100,063 The Group performs impairment test for the goodwill assigned to cash-generating units (CGUs) at least annually and when there are any indications that the carrying amount of the CGU is impaired. When the carrying amount of the CGU to which goodwill is allocated exceeds its recoverable amount, goodwill allocated to this CGU is impaired. SISTEMA PJSFC AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (amounts in millions of Russian Rubles, unless otherwise stated) 53 MTS – For the purposes of impairment testing, goodwill attributable to the MTS segment is allocated to enlarged CGUs as follow: Unallocated Telecom Other goodwill Total Balance as of 1 January 2021 Gross amount of goodwill 30,924 13,904 10,783 55,611 Accumulated impairment loss (1,466) (5,321) (2,064) (8,851) 29,458 8,583 8,719 46,760 Acquisitions 4,337 46 - 4,383 Reclassification 253 (253) - - Currency translation adjustment - 395 - 395 Balance as of 31 December 2021 Gross amount of goodwill 35,514 14,092 10,783 60,389 Accumulated impairment loss (1,466) (5,321) (2,064) (8,851) 34,048 8,771 8,719 51,538 Acquisitions 2,609 8,980 - 11,589 Measurement period adjustment (Note 6) (61) - - (61) Impairment - (489) - (489) Currency translation adjustment - 709 - 709 Balance as of 31 December 2022 Gross amount of goodwill 38,062 23,781 10,783 72,626 Accumulated impairment loss (1,466) (5,810) (2,064) (9,340) 36,596 17,971 8,719 63,286 The enlarged CGU (which represents a group of CGUs) “ Telecom ” includes the following business units: The “ Russia convergent ” – represents mobile and fixed line operations, which encompasses services rendered to customers across regions of Russia. Russia convergent also includes sales of equipment and accessories. Goodwill allocated to these CGUs has arisen on acquisitions made by MTS. The “ Moscow fixed line ” – represents the results of fixed line operations carried out in Moscow by MGTS, a subsidiary of MTS, and divided into two CGU – “MGTS commercial” and “MGTS service”. The enlarged CGU “ Other ” includes CGU “ Armenia ” , CGU “ Cloud Retail ” and CGU “ Entertainment ” . Unallocated goodwill represents goodwill recognized as a result of the purchase of MTS shares by the Group. It is not subject to allocation to CGUs as it is reviewed by management at the MTS segment level. Unallocated goodwill is tested for impairment based on the market capitalization of MTS. The recoverable amounts of the CGUs are determined based on their value in use. In assessing value in use, the estimated future cash flows are discounted to present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the CGU. Future cash flows calculations are based on a five-year operation plan. Estimation of future cash flows requires assumptions to be made in respect of uncertain factors, including management’ s expectations of OIBDA margins, timing and amount of future capital expenditure, terminal growth rates and appropriate discount rates to reflect the risks associated. SISTEMA PJSFC AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (amounts in millions of Russian Rubles, unless otherwise stated) 54 As a result of the impairment test performed on 31 December 2022, CGU “ Other ” was impaired in amount of RUB 489 million. In 2021 according to impairment test results, no impairment was recognized. The key assumptions used in the value in use calculations The table below represents OIBDA margin applied for value in use calculation of related CGUs: December 31, CGU 2022 2021 Russia Convergent 37.5%-37.9% 41.3%-46.9% Armenia 50.6%-54.2% 53.5%-60.3% MGTS Commercial 50.6%-54.2% 59.9%-63.0% MGTS Service 31.4%-33.9% 42.5%-51.8% Entertainment 2.1%-11,9% 4.8%-12% Cloud 39.8%-59.1% 37.7%-67.3% The table below presents capital expenditure as a percentage of revenue applied for value-in-use calculations of related CGUs: December 31, CGU 2022 2021 Russia Convergent 22% 18% Armenia 22% 22% MGTS Commercial 19% 16% MGTS Service 15% 16% Entertainment 10% 3% Cloud 61% 17% The terminal growth rate into perpetuity has been determined based on the nominal gross domestic product rates for the country of operation, adjusted for specific characteristic of the CGUs. The table below presents terminal growth rates applied for value-in-use calculations of related CGUs: December 31, CGU 2022 2021 Russia Convergent 1% 1% Armenia nil nil MGTS Commercial 1% 1% MGTS Service 1% 1% Entertainment 1.5% 1.5% Cloud 1% 1% SISTEMA PJSFC AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (amounts in millions of Russian Rubles, unless otherwise stated) 55 The table below presents pre-tax rates for the discounting of cash flows in functional currencies of related CGUs: December 31, CGU 2022 2021 Russia Convergent 16.9% 10.1% Armenia 12.3% 11.2% MGTS Commercial 17.3% 12.7% MGTS Service 16.5% 9.9% Entertainment 20.4% 13.1% Cloud 18.8% 13.6% Management believes that no reasonably possible change in the current period any of the above key assumptions would cause the carrying value of any cash-generating unit to materially exceed its recoverable amount. Agroholding “ Steppe ” – The recoverable amounts of the CGUs were determined based on their value in use. Cash flow models were prepared in Russian rubles. These calculations use cash flow projections based on financial budgets approved by management covering a five-year period. The growth rate does not exceed the long-term average growth rate for the business sector of the economy in which CGU operates. Key assumptions used for value-in-use calculations are determined based on market analysis, which is performed regularly. The table below presents key assumptions used for value in-use calculations: 2022 2021 Terminal cash flows growth rate 4.2% 3,8% Discount rate 14.0% 14.0% Range of average annual market price growth rate 3,97-6,98% 3,8-8,5% Management believes that no reasonably possible change in the current period in any of the above key assumptions would cause the carrying value of any cash-generating unit to materially exceed its recoverable amount. Binnopharm Group – The recoverable amounts of the CGUs were determined based on their value in use. The calculation of future cash flows is estimated on the basis of an eight-year business plan in 2022 and on the basis of a five-year business plan in 2021. The management considers the planning horizon with a period of 8 years to be sufficiently reliable for making judgments, assessments and managerial decisions in view of the specifics of the work of generic companies in the pharmaceutical market: the duration of preparation for the launch of products into the market, the possibility of launching generic products only after the expiration of patent protection of original products, the lifecycle of products and the presence of stable forecasted demand for medicines. Additionally, the Group calculated future cash flows based on a standard five-year business plan and concluded that, due to growth rates in long- term periods not exceeding the projected inflation rate, the effect on the recoverable amount is insignificant. The key assumptions used to calculate the CGUs are presented below: 2022 2021 Average annual revenue growth rate 12.2% 17.2% Average annual growth rate of expenses 8.6% 14.1% Discount rate 15.3% 15.3% Terminal cash flows growth rate 3.0% 3.0% SISTEMA PJSFC AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (amounts in millions of Russian Rubles, unless otherwise stated) 56 Management believes that no reasonably possible change in the current period in any of the above key assumptions would cause the carrying value of any cash-generating unit to materially exceed its recoverable amount. 16. OTHER INTANGIBLE ASSETS Other intangible assets are mainly represented by billing and telecommunication software and other software, operating licenses, acquired customer bases of MTS, patents, trademarks and registration certificates of Binnopharm Group. Intangible assets with finite useful lives that are acquired separately are carried at cost less accumulated amortisation and impairment losses. Intangible assets acquired in a business combination and recognised separately from goodwill are initially recognised at their fair value at the acquisition date (which is regarded as their cost). Subsequent to initial recognition, intangible assets acquired in a business combination are reported at cost less accumulated amortisation and impairment losses, on the same basis as intangible assets that are acquired separately. All finite-life intangible assets are amortised using the straight-line method utilising estimated useful lives of the assets as follows: Operating licenses 1-20 years Billing and telecommunication software 1-20 years Radio frequencies 1-15 years Customer base 4-31 years Cost to obtain contracts 2-5 years Software and other 1-10 years The estimated useful life and amortisation method are reviewed at the end of each reporting period, with the effect of any changes in estimate being accounted for on a prospective basis. Trademarks with indefinite contractual life are not amortised, but are reviewed, at least annually, for impairment. Other intangible assets other than goodwill as at 31 December 2022 and 2021 consisted of the following: 31 December 2022 31 December 2021 Carrying amounts of: Amortised intangible assets: Billing and telecommunication software 70,875 70,627 Operating licenses 8,973 9,317 Radio frequencies 609 905 Acquired customer base 6,544 2,853 Software and other 40,227 22,656 Cost to obtain contracts 8,394 7,778 Patents and amortisable trademarks 10,838 12,314 146,460 126,450 Unamortised intangible assets: Trademarks 12,800 12,734 Total 159,260 139,184 SISTEMA PJSFC AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (amounts in millions of Russian Rubles, unless otherwise stated) 57 MTS operating licenses – In connection with providing telecommunication services, the Group has been issued various GSM operating licenses by the Russian Ministry of Information Technologies and Communications. In addition to the licenses received directly from the Russian Ministry of Information Technologies and Communications, the Group has been granted access to various telecommunication licenses through acquisitions of subsidiaries. Operating licenses contain conditions specified by legislation which generally include the required date of services provision, territorial coverage and expiration date. Management believes that the Group is in compliance with all material terms of its licenses. The Group’ s operating licenses do not provide for automatic renewal. All licenses covering the territories of the Russian Federation expired as at December 31, 2022 were renewed. The cost to renew the licenses was not significant. Weighted-average period until the next renewal of licenses in the Russian Federation is five years. The license for the provision of telecommunication services in Armenia is valid until 2034. SISTEMA PJSFC AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (amounts in millions of Russian Rubles, unless otherwise stated) 58 Billing and Software Non- Cost to Patents and telecom Operating Customer Radio and amortisable obtain amortisable software licenses bases frequencies other (1) trademarks contracts trademarks Total Cost Balance as of 1 January 2021 136,665 31,722 11,149 5,604 24,563 6,543 14,149 - 230,395 Additions 34,421 1,365 2,963 - 8,077 - 3,653 43 50,522 Disposals (14,783) (44) (680) (233) (2,111) - (3,287) - (21,138) Business combinations 571 35 591 - 9,809 6,191 - 12,884 30,081 Currency translation adjustment 381 992 (34) - (35) - - - 1,304 Other (114) - - 1 (17) - - - (130) Balance as of 31 December 2021 157,141 34,070 13,989 5,372 40,286 12,734 14,515 12,927 291,034 Additions 31,935 1,369 - - 15,938 - 3,946 1 53,189 Disposals (11,810) (69) (619) (174) (2,500) (50) (3,250) - (18,472) Business combinations 713 (21) 4,447 - 9,170 116 263 - 14,688 Disposal of subsidiaries - - - - (895) - - - (895) Currency translation adjustment 298 1,778 (582) - (534) - - - 960 Other (37) 33 - (34) 56 - - (73) (55) - - - - - - - - - Balance as of 31 December 2022 178,240 37,160 17,235 5,164 61,521 12,800 15,474 12,855 340,449 Accumulated depreciation and impairment Balance as of 1 January 2021 (71,486) (21,931) (10,789) (4,362) (15,478) - (6,600) - (130,646) Disposals 14,716 7 679 244 2,076 - 3,287 - 21,009 Amortisation expense (29,737) (1,857) (1,026) (349) (4,270) - (3,424) (613) (41,276) Impairment - (1) - - (39) - - - (40) Currency translation adjustment (211) (971) - - 55 - - - (1,127) Other 204 - - - 26 - - - 230 (86,514) (24,753) (11,136) (4,467) (17,630) - (6,737) (613) (151,850) Balance as of 31 December 2021 (86,514) (24,753) (11,136) (4,467) (17,630) - (6,737) (613) (151,850) Disposals 11,792 40 622 193 1,826 - 3,253 - 17,726 Amortisation expense (31,702) (1,701) (220) (312) (5,516) - (3,596) (1,224) (44,271) Impairment (1,150) - - - (373) - - (180) (1,703) Disposal of subsidiaries - - - - (4) - - - (4) Currency translation adjustment 191 (1,742) 43 - 97 - - - (1,411) Other 18 (31) - 31 306 - - - 324 Balance as of 31 December 2022 (107,365) (28,187) (10,691) (4,555) (21,294) - (7,080) (2,017) (181,189) (1) The line “ Software and other ” includes, among other things, MTS ’ s content, as well as contracts for the use of fishing sites and agreements on securing and providing a share of the quota of extraction (catch) of aquatic biological resources in the acquired assets of the fishing industry. SISTEMA PJSFC AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (amounts in millions of Russian Rubles, unless otherwise stated) 59 17. INVESTMENTS IN ASSOCIATES AND JOINT VENTURES An associate is an entity over which the Group has significant influence and that is neither a subsidiary nor an interest in a joint venture. Significant influence is the power to participate in the financial and operating policy decisions of the investee but is not control or joint control over those policies. A joint venture is a joint arrangement whereby the parties that have joint control of the arrangement have rights to the net assets of the joint arrangement. Joint control is the contractually agreed sharing of control of an arrangement, which exists only when decisions about the relevant activities require unanimous consent of the parties sharing control. An investment in an associate or a joint venture is accounted for using the equity method from the date on which the investee becomes an associate or a joint venture. On acquisition of the investment in an associate or a joint venture, any excess of the cost of the investment over the Group ’ s share of the net fair value of the identifiable assets and liabilities of the investee is recognised as goodwill, which is included within the carrying amount of the investment. Any excess of the Group’ s share of the net fair value of the identifiable assets and liabilities over the cost of the investment, after reassessment, is recognised immediately in profit or loss in the period in which the investment is acquired. Additional investments in associates and joint ventures are added to the carrying amount of the equity-method investee without specific allocation to the underlying assets and liabilities of the investee. The additional ownership interest effectively increases the notional goodwill relating to the equity-method investee. After a transaction, the share of investee ’ s profit or loss recognised by the Group is based on the new ownership interest. Investments in associates and joint ventures as at 31 December 2022 and 2021 consisted of the following: Participating Carrying Participating Carrying share value share value Assosiates MTS Belarus 49.00% 5,798 49.00% 6,265 Etalon (Note 6) 48.80% - 29.79% 18,312 Ozon 32.96% - 33.04% - 5,798 24,577 Joint ventures Megapolis-Invest 75.86% 9,045 75.86% 10,375 Michurinskiy project 50.00% 5,894 50.00% 5,646 New Investment Holding 50.00% 367 50.00% 557 Segezha Zapad 60.00% + 2 shares - 100.00% 410 15,306 16,988 Other associates and joint ventures 22,356 21,925 Total 43,460 63,490 2022 2021 SISTEMA PJSFC AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (amounts in millions of Russian Rubles, unless otherwise stated) 60 Participating share in profit or loss of associates and joint ventures is determined based on the percentage of the equity interest owned by the Group or on allocations of profits and losses between investors if designated by shareholders agreements. Ozon is one of the largest players in the Russian e-commerce market, representing goods in various categories: electronics, household appliances, home goods and others. It has its own logistics network, operating marketplace technology, a developed web platform. Ozon Holdings PLC is registered in the Republic of Cyprus. The Group’ s share in the loss of Ozon recognized for the year ended 31 December 2022 amounted to RUB 0 million (31 December 2021: RUB 12,584 million). The unrecognized loss represents the Group’ s share in the additional losses after the carrying amount of the Group ’ s investment in Ozon amounted to nil. The Group did not incur legal or constructive obligations or make payments on behalf of Ozon. The amount of unrecognized loss for 12 months 2022 amounted to RUB 19,178 million (12 months 2021: RUB 6,409 million). Megapolis-Invest – In 2020, the Group and Sberbank Investments signed the shareholders agreement and agreements granting Sistema the right to acquire in 2022-2023 and Sberbank Investments the right to sell to the Group its stake in the equity capital of Megapolis-Invest in 2023 (hereinafter – Option agreements). The right of claim under loan agreement given by Sberbank Investments to Megapolis-Invest shall be acquired by the Group in any of the events of execution under Option agreements. The fair value of the financial instruments arising from Option agreements is determined on the basis of the Black-Scholes model using the discounted cash flow method when calculating the cost of a stake in Megapolis-Invest. The fair value of the financial instruments as at 31 December 2022 is approximately nil. The Group does not have the exclusive right to manage the relevant activities of Megapolis-Invest and therefore the investment is accounted for under equity method. In February 2021, Megapolis-lnvest LLC signed an agreement to acquire an additional 29.64% stake in Elektrozavod JSC from the third party for RUB 5.8 billion. As a result, upon the completion of the deal, the Megapolis-lnvest LLC total ownership interest in Elektrozavod JSC increased to 94.01% of the company’ s authorized capital. As a result of transaction, the Group did not obtain control over Elektrozavod JSC. “ MTS Belarus ” is a telecommunications operator in the Republic of Belarus. Project Michurinsky carries out construction and sale of apartments, as well as construction of a medical center. The company is registered in the Russian Federation. New Investment Holding – In September 2021, New Investment Holding JSC, acquired the Niarmedic International Limited, which owns 100% of the authorized capital of Nearmedic Plus LLC, Nearmedic Pharma LLC and a number of other companies conducting business in Russia and Italy in the fields of pharmaceuticals and medicine for one ruble. The net debt of the Nearmedic Group as at the closing date of the Transaction amounted to RUB 5.9 billion. SISTEMA PJSFC AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (amounts in millions of Russian Rubles, unless otherwise stated) 61 Sistema and Sberbank Group (hereinafter – Sberbank) provided equity financing in equal shares for the total amount RUB 1.2 billion to repay part of the Nearmedic Group ’ s debt to Sberbank. The Group and Sberbank Investments have entered into a shareholders agreement and option agreements with a maturity of 3.5 years from the closing date of the Deal, granting Sistema the right to acquire and Sberbank Investments the right to sell to the Group Sberbank Investments ’ stake in the capital of New Investment Holding JSC with the simultaneous transfer to the Corporation the rights to claim Sberbank on a loan granted to the Nearmedic Group in the amount of up to RUB 2.8 billion. The fair value of financial instruments arising from entering into Option Agreements as at 31 December 2022 is close to zero. As at 31 December 2022, The Group, with the involvement of an independent appraiser, completed the assessment of the fair value of the acquired assets and liabilities Group Segezha West – As at 31 December 2022, the Group assessed the factors of control over the companies of the Group Segezha West. Management considered the existence of substantive rights and the practical possibility of exercising them, in particular, the existence of any barriers to the exercise of rights, the need for the consent of several parties and the existence of economic benefits in the exercise of rights, the price of their exercise, as well as the likelihood of exercising options on withdrawal of financial partners from the project. Based on the results of the assessment, management concluded that the Group has the practical ability to exercise its rights and, therefore, the Group exercises control over the Group Segezha West. Other – During 2022, the Group entered into the following investments in associates and joint ventures: Due to obtaining control over the Etalon Group, the Group recognized investments in the joint venture LLC Strana-Etalon LLC acquired in 2022. LLC Strana-Etalon LLC is involved in real estate development projects in Tyumen. As at 31 December 2022, the carrying amount of investment in joint venture is RUB 1,727 million. In September 2022, the Group acquired a 50.85% ownership interest in Navitel for a cash contribution of RUB 690 million. Navitel is a leading digital navigation solution provider for automotive industries around the world. The Group holds more than 50% of the equity interests in Navitel, it has significant influence over the investee based on its ownership of equity shares, representation on the investee ’ s Board of Directors. SISTEMA PJSFC AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (amounts in millions of Russian Rubles, unless otherwise stated) 62 The financial position and results of operations of associates as at and for the years ended 31 December 2022 and 2021 were as follows: 2022 2021 2022 2021 2022 2021 2022 2021 Non-current assets 14,743 19,030 129,918 74,752 n/a 16,648 144,661 110,430 Current assets 11,940 15,386 154,903 166,586 n/a 205,450 166,843 387,422 Total assets 26,683 34,416 284,821 241,338 n/a 222,098 311,504 497,852 Non-current liabilities (4,497) (9,062) (106,594) (86,794) n/a (105,910) (111,091) (201,766) Current liabilities (10,354) (12,568) (194,874) (123,936) n/a (54,831) (205,228) (191,335) Total liabilities (14,851) (21,630) (301,468) (210,730) n/a (160,741) (316,319) (393,101) Equity attributable to owners of the Company 11,832 12,786 (16,647) 30,608 n/a 61,357 (4,815) 104,751 The Group’s share in the profit and loss 49.00% 49.00% 32.96% 33.04% 48.80% 29.79% n/a n/a Fair value adjustment on the date of acquisition - - (14,171) (14,189) - 28 (14,171) (14,161) Accumulated impairment - - - - - - - - Сapital transactions - - (5,952) (2,333) - - (5,952) (2,333) Unrecognised loss - - 25,587 6,409 - - 25,587 6,409 Carrying amount of the Group’s interest 5,798 6,265 - - - 18,312 5,798 24,577 Total revenues 37,444 39,383 277,115 178,215 20,060 87,138 334,619 304,736 Total profit/(loss) for the year 9,863 10,379 (58,187) (56,779) 720 3,006 (47,604) (43,394) The Group’s share in profit/(loss) 4,833 5,086 - (12,584) 214 843 5,047 (6,655) Total comprehensive income/(loss) 8,322 10,562 (58,246) (56,782) 720 3,006 (49,204) (43,214) The Group’s share in comprehensive income/(loss) for the year 4,078 5,175 - (12,584) 214 843 4,292 (6,566) Dividends paid (4,545) (4,034) - - - (1,076) (4,545) (5,110) Etalon Group (1) MTS Belarus Ozon Total (1) The company ’ s financial result for January-April 2022. The Group ’ s share before obtaining control was 29.79% (Note 6). SISTEMA PJSFC AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (amounts in millions of Russian Rubles, unless otherwise stated) 63 The financial position and results of operations of joint ventures as at and for the years ended 31 December 2022 and 2021 were as follows: 2022 2021 2022 2021 2022 2021 2022 2021 2022 2021 Non-current assets 26,838 29,773 566 929 5,761 5,745 n/a 3,217 33,165 39,664 Current assets 10,211 8,256 12,884 18,842 963 1,420 n/a 900 24,057 29,418 Total assets 37,049 38,029 13,450 19,771 6,724 7,165 n/a 4,117 57,223 69,082 Non-current liabilities (3,269) (24,047) - - (4,859) (4,736) n/a (2,947) (8,128) (31,730) Current liabilities (27,677) (6,127) (186) (7,003) (793) (1,315) n/a (760) (28,657) (15,205) Total liabilities (30,947) (30,174) (186) (7,003) (5,652) (6,051) n/a (3,707) (36,785) (46,935) Non-controlling interest (358) (358) - - - - n/a - (358) (358) Equity attributable to owners of the Company 5,745 7,497 13,264 12,768 1,072 1,114 n/a 410 20,080 21,789 The Group’s share in the profit and loss 75.86% 75.86% 50.00% 50.00% 50.00% 50.00% 60.00% + 2 shares 100.00% n/a n/a Fair value adjustment on the date of acquisition 4,687 4,687 (738) (738) - - - - 3,949 3,949 Accumulated impairment - - - - - - - - - - Carrying amount of the Group’s interest 9,045 10,375 5,894 5,646 367 557 - 410 15,306 16,988 Total revenues 8,866 6,806 2,030 9,731 2,117 1,092 - - 13,013 17,629 Total profit/(loss) for the year (4,004) (2,548) 496 2,848 (380) (87) - - (3,888) 213 The Group’s share in profit/(loss) (2,807) (1,957) 192 1,392 (190) (43) - - (2,805) (608) Total comprehensive (loss)/income (4,004) (2,548) 496 2,848 (380) (87) - - (3,888) 213 The Group’s share in comprehensive income/(loss) for the year (2,807) (1,957) 192 1,392 (190) (43) - - (2,805) (608) - - - - - - - - - - Dividends paid - - - - - - - - - - Megapolis- Invest Total New Investment Segezha project Holding Zapad Michurinskiy SISTEMA PJSFC AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (amounts in millions of Russian Rubles, unless otherwise stated) 64 The financial position and results of operations of other associates and joint ventures as at and for the years ended 31 December 2022 and 2021 relating to the Group ’ s share were as follows: 2022 2021 Non-current assets 18,837 49,594 Current assets 31,242 21,737 Total assets 50,079 71,331 Non-current liabilities (12,607) (26,331) Current liabilities (20,000) (19,166) - - Total liabilities (32,607) (45,497) Non-controlling interest (2,259) (977) Net assets 15,213 24,858 Carrying amount of the Group’s interest 22,356 21,925 The Group's share in revenues 15,930 24,495 The Group’s share in profit 938 661 The Group’s share in comprehensive income for the year 913 678 - - Dividends paid (476) (1,104) Other 18. OTHER FINANCIAL ASSETS The Group ’ s financial assets, other than cash and cash equivalents, deposits in banks and accounts receivable shown separately on the face of the consolidated statements of financial position, primarily comprise assets of MTS Bank, the Group’s subsidiaries engaged in banking activities, and investments of the Corporate segment. The Group applies expected credit losses model for impairment analysis of financial assets classified at amortised cost. The Group applies the simplified approach for its trade and other receivables which requires recognition of expected credit losses at a lifetime from initial recognition of trade receivables. Financial assets are recognised initially at fair value plus transaction costs that are directly attributable to the acquisition or issue of the financial asset, except for a financial asset accounted for at fair value through profit or loss, in which case transaction costs are expensed. Subsequently such financial assets are measured either at amortised cost or fair value depending on the classification of those assets. Financial assets are classified into the following categories depending on their nature and purpose: Financial assets measured at fair value through profit or loss (FVTPL), financial assets measured at fair value through other comprehensive income (FVTOCI), financial assets measured at amortised costs. If the financial assets are held for collecting contractual cash flows in the form of principal and interest on the specified dates, they are classified as carried at amortised cost. SISTEMA PJSFC AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (amounts in millions of Russian Rubles, unless otherwise stated) 65 If the financial assets are held not only for collecting contractual cash flows in the form of principal and interest on the specified dates, but also for selling the financial asset, they are classified as measured at fair value through other comprehensive income. All other financial assets are classified as measured at fair value through profit or loss. As at 31 December 2022 and 2021 financial assets, other than those shown separately on the face of the statements of financial position, less allowance for impairment losses, comprise: 31 December 31 December 2022 2021 Financial assets measured at fair value through profit or loss Debt and equity securities 80,584 79,282 Contingent consideration 473 1,867 Option contracts 112 112 Derivatives embedded in lease agreements 82 434 Cross-currency derivatives not designated as cash flow hedges 23 110 Currency rate swaps and forwards not designated as hedge instruments 2,207 4,640 83,481 86,445 Financial assets measured at fair value through other comprehensive income Debt and equity securities 20,132 12,804 20,132 12,804 Financial assets measured at amortized cost Debt securities 3,220 22,996 Bank loans to customers 224,700 217,525 Interbank loans due from banks 3,288 4,010 Other loans 40,874 25,671 272,082 270,202 Total financial assets 375,695 369,451 Current 171,817 154,465 Non-current 203,878 214,986 Total financial assets 375,695 369,451 The following table summarizes changes in loss allowance for financial assets other than for financial assets attributable to the Group’s b anking activities and accounts receivable for 2022 and 2021: 2022 2021 Balance as of 1 January calculated under IFRS 9 4,583 4,688 Charge for the period 513 (54) Amounts written off against the allowance (1,042) (619) Currency translation adjustments (9) 568 Balance as of 31 December calculated under IFRS 9 4,045 4,583 SISTEMA PJSFC AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (amounts in millions of Russian Rubles, unless otherwise stated) 66 As at 31 December 2022 and 2021 , financial assets attributable to the Group’s banking activities comprise: 31 December 31 December 2022 2021 Financial assets measured at fair value through profit or loss Debt and equity securities 915 23,278 915 23,278 Financial assets measured at fair value through other comprehensive income Debt and equity securities 20,132 11,782 20,132 11,782 Financial assets measured at amortized cost Cash and cash equivalents 58,221 30,371 Bank loans to customers 261,354 239,698 Interbank loans due from banks 3,432 4,010 Debt securities 2,805 22,999 325,812 297,078 Less: allowance for loan losses (36,654) (22,173) 310,205 309,965 The movement in the allowance for loan losses, attributable to the Group’s banking activities, during 2022 and 2021 was as follows: 2022 2021 Allowance for loan losses, 1 January 22,173 17,511 Charge for the period 23,199 11,032 Amounts written-off against the allowance (3,776) (3,361) Disposal (3,301) (4,334) Reversal of allowance written-off 513 1,557 Transition to discontinued operations (990) - Currency translation adjustment (1,164) (232) Allowance for loan losses, 31 December 36,654 22,173 In accordance with IFRS 9, the Group records an allowance for expected credit losses (ECL) for all financial assets not held at fair value through profit or loss in “ cost of sales ” line. ECLs are based on the difference between the contractual cash flows due under the contract and cash flows that the Group expects to receive. The shortfall is discounted at an approximation to the asset’s original effective interest rate. The allowance expense for expected credit losses relating to banking activities is recorded in the “ Cost of sales ” line. The expected credit-loss approach uses three stages for allocating impairment losses: Stage 1: expected credit losses within the next twelve months. Stage 1 includes all contracts with no significant increase in credit risk since initial recognition and usually contains new contracts that are fewer than 31 days past due date. The portion of the lifetime expected credit losses resulting from default events possible within the next 12 months is recognised. SISTEMA PJSFC AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (amounts in millions of Russian Rubles, unless otherwise stated) 67 Stage 2: expected lifetime credit losses- not credit impaired. If a financial asset has a significant increase in credit risk since initial recognition but is not yet credit impaired, it is moved to Stage 2 and measured at lifetime expected credit loss. This is defined as the expected credit loss that results from all possible default events over the expected life of the financial instrument. Stage 3: expected lifetime credit losses – credit impaired. If a financial asset is defined as credit impaired or in default, it is transferred to Stage 3 and measured at lifetime expected credit loss. The Group considers a financial asset to be in default when the borrower is unlikely to pay its credit obligations to the Group in full, without recourse by the Group to actions such as realizing security (if any is held). Movements in impairment loss allowance attributable to loans to individuals for the year ended 31 December 2022 and 2021 were as follows: Stage 1 Stage 2 Stage 3 Total Balance as of 1 January 2022 6,093 3,361 8,522 17,976 - Transfer to Stage 1 1,844 (1,690) (154) - - Transfer to Stage 2 (2,600) 3,086 (486) - - Transfer to Stage 3 (115) (10,263) 10,378 - New financial assets originated or purchased 4,644 - - 4,644 Change due to change of credit risk (3,813) 12,497 9,163 17,847 Write-offs - - (3,720) (3,720) Sale - - (3,220) (3,220) Recovery of previously written-off assets - - 287 287 Balance as of 31 December 2022 6,053 6,991 20,770 33,814 Stage 1 Stage 2 Stage 3 Total Balance as of 1 January 2021 3,099 1,446 8,147 12,692 - Transfer to Stage 1 1,809 (1,633) (176) - - Transfer to Stage 2 (939) 1,220 (281) - - Transfer to Stage 3 (278) (4,691) 4,969 - New financial assets originated or purchased 3,821 - - 3,821 Change due to change of credit risk (1,419) 7,019 2,887 8,487 Write-offs - - (3,282) (3,282) Sale - - (4,324) (4,324) Recovery of previously written-off assets - - 582 582 Balance as of 31 December 2021 6,093 3,361 8,522 17,976 SISTEMA PJSFC AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (amounts in millions of Russian Rubles, unless otherwise stated) 68 Movements in impairment loss allowance on loans to legal entities for the year ended 31 December 2022 and 2021 were as follows: Stage 1 Stage 2 Stage 3 Total Balance as of 1 January 2022 1,003 55 3,140 4,198 - Transfer to Stage 1 29 (28) (1) - - Transfer to Stage 2 (135) 136 (1) - - Transfer to Stage 3 - (89) 89 - New financial assets originated or purchased 194 - - 194 Change due to change of credit risk (57) 46 (184) (195) Sales of financial assets - - (6) (6) Write-offs - - (15) (15) Recovery of previously written-off assets - - 235 235 Discontinued operations (185) (30) (815) (1,030) Foreign exchange difference (635) - 94 (541) Balance as of 31 December 2022 214 90 2,536 2,840 Stage 1 Stage 2 Stage 3 Total Balance as of 1 January 2021 1,028 221 3,570 4,819 - Transfer to Stage 1 119 (119) - - - Transfer to Stage 2 (46) 49 (3) - - Transfer to Stage 3 (105) (26) 131 - New financial assets originated or purchased 355 - - 355 Change due to change of credit risk (168) (67) (1,433) (1,668) Sales of financial assets - - - - Write-offs - - (49) (49) Recovery of previously written-off assets - - 975 975 Foreign exchange difference (180) (3) (51) (234) Balance as of 31 December 2021 1,003 55 3,140 4,198 The following valuation categories represent the Group’s classification of credit quality of the loans: Low to fair risk – loans of high credit quality and low probability of default, not past due or immaterially overdue; Monitoring – loans with increased probability of default including restructured loans; Impaired – impaired loans including more than 90 days overdue. SISTEMA PJSFC AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (amounts in millions of Russian Rubles, unless otherwise stated) 69 The table below summarizes information regarding the quality of loans to individuals as at 31 December 2022 and 2021: 31 December 2022 Stage 1 Stage 2 Stage 3 Total Low to fair risk 197,198 16,268 - 213,466 Monitoring - 8,105 5,034 13,139 Impaired - - 23,509 23,509 Loss allowance (6,053) (6,991) (20,770) (33,814) Total 191,145 17,382 7,773 216,300 191145 17382 7773 216300 31 December 2021 Stage 1 Stage 2 Stage 3 Total Low to fair risk 174,667 756 - 175,423 Monitoring - 7,125 831 7,956 Impaired - - 10,072 10,072 Loss allowance (6,093) (3,361) (8,521) (17,975) Total 168,574 4,520 2,382 175,476 The table below summarizes information regarding the quality of loans to legal entities as at 31 December 2022 and 2021: 31 December 2022 Stage 1 Stage 2 Stage 3 Total Low to fair risk 3,582 4,236 - 7,818 Monitoring 179 191 - 370 Doubtful - - 2 2 Impaired - - 3,050 3,050 Loss allowance (214) (90) (2,536) (2,840) Total 3,547 4,337 516 8,400 31 December 2021 Stage 1 Stage 2 Stage 3 Total Low to fair risk 34,643 721 - 35,364 Monitoring 5,700 1,321 - 7,021 Doubtful - - 767 767 Impaired - - 3,095 3,095 Loss allowance (894) (194) (3,110) (4,198) Total 39,449 1,848 752 42,049 SISTEMA PJSFC AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (amounts in millions of Russian Rubles, unless otherwise stated) 70 Analysis by credit quality of loans to individuals outstanding as at 31 December 2022 is as follows: As of 31 December 2022 Gross loans Impairment loss allowance Net loans Impairment loss allowance to gross loans Collectively assessed Not past due 213,465 (9,922) 203,543 5% Overdue: up to 30 days 6,203 (1,718) 4,485 28% 31 to 60 days 3,588 (1,904) 1,684 53% 61 to 90 days 3,037 (1,930) 1,107 64% 91 to 180 days 6,578 (4,779) 1,799 73% over 180 days 16,775 (13,513) 3,262 81% Total collectively assessed 249,646 (33,766) 215,880 14% Individually impaired Not past due 308 (18) 290 6% Overdue: up to 30 days - - - 0% 31 to 60 days 3 - 3 0% 61 to 90 days - - - 0% 91 to 180 days 18 - 18 0% over 180 days 139 (30) 109 22% Total individually impaired 468 (48) 420 10% Total 250,114 (33,814) 216,300 14% Analysis by credit quality of loans to small and medium-sized enterprises outstanding as at 31 December 2022 is as follows: As of 31 December 2022 Gross loans Impairment loss allowance Net loans Impairment loss allowance to gross loans Collectively assessed Not past due 760 (10) 750 1% Overdue: up to 30 days 20 (4) 16 20% 31 to 60 days 17 (16) 1 94% 61 to 90 days 7 (6) 1 86% 91 to 180 days 29 (25) 4 86% over 180 days 621 (446) 175 72% Total 1,454 (507) 947 35% SISTEMA PJSFC AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (amounts in millions of Russian Rubles, unless otherwise stated) 71 The table below summarizes carrying value of loans to customers analysed by type of collateral obtained by the Group: 31 December 31 December 2022 2021 Loans collateralized by cash deposits - 556 Loans collateralized by guaranties of legal entities 9,085 36,746 Loans collateralized by pledge of real estate 26,012 19,115 Loans collateralized by pledge of equipment - 1 Loans collateralized by securities 131 1,946 Loans collateralized by pledge of inevntories - 924 Unsecured loans 226,126 180,410 Allowance for impairment losses (36,654) (22,173) Total loans to customers, net 224,700 217,525 19. RESTRICTED CASH As at 31 December 2022 several companies of the Group has RUB 1,089 million (2021: RUB 4,909 million) of cash on special accounts which are presented as restricted cash within current assets. 20. INVENTORIES Inventory mainly include the retail network of MTS and raw materials and product of Segezha Group and Steppe, and the costs of construction projects of Etalon. Inventory cost is determined using the weighted average cost method. Further, inventory is accounted at the lower of net realisable value and carrying amount. The Group periodically assesses its inventories for obsolete or slow-moving stock. The cost of raw materials includes the cost of purchase, customs duties, transportation and handling costs. Work-in-progress and finished goods are stated at production cost which includes direct production expenses and manufacturing overheads. Inventories as at 31 December 2022 and 2021 consisted of the following: 2022 2021 Raw materials and spare parts 33,486 25,342 MTS finished goods and goods for resale 14,199 18,806 Other finished goods and goods for resale 28,159 15,619 Inventories under construction and development 152,733 - Other work-in-progress 14,766 16,242 Total 243,343 76,009 As at 31 December 2022 Group’s inventories under construction and development include among others inventories related to construction projects that will be completed after more than 12 months for the Etalon. SISTEMA PJSFC AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (amounts in millions of Russian Rubles, unless otherwise stated) 72 The cost of inventories recognised as an expense during the year in respect of continuing operations was RUB 154,042 million (2021: RUB 154,894 million). The cost of inventories recognised as an expense includes RUB 8,169 million (2021: RUB 2,585 million) in respect of write-downs of inventory to net realisable value and has been reduced by RUB 4,529 million (2021: RUB 261 million) in respect of the reversal of such write-downs. 21. ACCOUNTS RECEIVABLE Accounts receivable include amounts owed by the customers to the Group. The carrying value of all trade receivables is reduced by appropriate allowances for ECL. For trade receivables the Group applies a simplified approach and calculates ECL based on lifetime expected credit losses. Accounts receivable, net of allowances, as at 31 December 2022 and 2021 consisted of the following: 2022 2021 Accounts receivable 104,288 76,661 Allowance for ECL (7,984) (7,366) Total 96,304 69,295 Below is the age analysis of receivables that are past due but not impaired: 2022 2021 60-90 days 1,974 1,634 more than 90 days 6,571 3,404 Total 8,545 5,038 Movement in the allowance is as follows: 2022 2021 Balance at the beginning of the year (7,366) (7,089) Charge for the period (4,228) (3,061) Usage of allowance to doubtful accounts write-off 2,899 1,808 Allowance recovery 627 850 Currency exchange gain 84 126 Balance at the end of the year (7,984) (7,366) SISTEMA PJSFC AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (amounts in millions of Russian Rubles, unless otherwise stated) 73 22. EQUITY Share capital – As at 31 December 2022 and 2021, the Company had 9,650,000,000 voting common shares with a par value of RUB 0.09 issued, of which 9 420 050 947 and 9,393,161,501 shares were outstanding, respectively. Treasury shares – Movement of treasury shares during 2022 and 2021 years in quantity was as follows: 2022 2021 Balance at the beginning of the year 256,838,499 143,815,709 - - Purchase of own shares 13,683,100 192,072,542 Sale of own shares - (20,997,160) Settlements under long-term motivation program (40,572,546) (58,052,592) Balance at the end of the year 229,949,053 256,838,499 Dividends – Dividends declared to the holders of the Company’s ordinary shares are included in the financial statements in the period in which the dividends are approved for distribution by the shareholders. On 12 August 2022, an annual general meeting of shareholders decided not to pay dividends based on the results of 2021. 23. ACCUMULATED OTHER COMPREHENSIVE INCOME Components of accumulated other comprehensive income balance, net of taxes, as at 31 December 2022 and 2021: 2022 2021 Cumulative effect of translation to the presentation currency 22,609 21,264 including effect on assets classified as held for sale 5,961 - Unrecognized actuarial income 518 518 Total accumulated other comprehensive income 23,127 21,782 Less: attributable to non-controlling interests (5,728) (4,997) Total accumulated other comprehensive income, attributable to Shareholders of Sistema PJSFC 17,399 16,785 SISTEMA PJSFC AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (amounts in millions of Russian Rubles, unless otherwise stated) 74 24. LOANS AND BORROWINGS The Group’s borrowings primarily comprise bank loans and corporate bonds. The Group enters into variable-to-fixed interest rate swap agreements to manage exposure to changes in variable interest rates related to a portion of its obligations, as well as into cross-currency interest-rate swap agreements to mitigate the impact of both, interest rate and exchange rate fluctuations, for a certain portion of its USD- and Euro-denominated borrowings. Borrowings are initially recognised at fair value less transaction costs and subsequently measured at amortised cost using the effective interest method. Finance costs in profit or loss consist of interest expense for financial liabilities not classified as at FVTPL. In 2022, finance costs did not include borrowing costs that were included in the cost of qualifying assets in amount of RUB 1,194 million (2021: RUB 853 million). At 31 December 2022 and 2021 , the Group’s borrowings comprised: 31 December 31 December 2022 2021 Bank loans 572,667 425,479 Corporate bonds 473,864 414,911 Other 14,534 10,427 Total 1,061,065 850,817 Current 298,846 209,306 Non-current 762,219 641,511 At December 31, 2022, the Group ’ s bank loans include, among other thing, the project financing of Etalon in the amount of RUB 54,762 million. As at 31 December 2022 the bank balances kept in escrow accounts of Etalon amounted to RUB 60,362 million. Bank balances kept in escrow accounts are not included in the balance of cash and cash equivalents in the Group’s consolidated statement of financial po sition. They represent funds received by authorized banks from escrow-account holders – participants of share participation agreements for construction of real estate as a means of payment of consideration under such agreements. The funds will be transferred to the Group’s bank accounts upon completion of construction of respective real estate. SISTEMA PJSFC AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (amounts in millions of Russian Rubles, unless otherwise stated) 75 Bank loans – As at 31 December 2022 and 2021 , the Group’s loans from banks and financial institutions consisted of the following: Interest rate (as at 31 December 31 December 31 December Maturity 2022) 2022 2021 EUR-denominated: Alfa Bank 2027 0.24% 293 16,548 Sberbank 2022 - - 6,682 ING Bank 2023-2027 EURIBOR+1.5% (4.13%) 2,738 3,609 Other 302 1,221 3,333 28,060 RUB-denominated: Sberbank 2023-2029 0.01%-22.85% CB+1.01%-3% (8.51% - 10.5%) 273,773 181,311 VTB 2023-2027 7.08%-23%; CB+0.5%-2.75% (8% - 10.25%) 162,630 143,480 Alfa Bank 2023-2030 0.01%-13.9%; CB+2.14%-3.85% (9.64% - 11.35%) 55,621 29,652 Gazprombank 2023-2027 7.3%-9.6%; CB+1.7%-2.45% (9.2% - 9.95%) 33,299 22,011 Moscow Credit Bank 2025 10.25%-10.63% 14,842 - Otkrytie 2024-2026 9.45% CB+2.9%-3.15% (10.4% - 10.65%) 6,578 2,412 Bank DOM.RF 2026-2027 0.01%; CB+4% (11.5%) 4,674 - Uralsib 2025 10%-12% 2,500 - AiCiBiCi 2023 8.50% 2,125 3,600 Other 12,604 14,589 568,646 397,055 Other currencies 688 364 Total bank loans 572,667 425,479 SISTEMA PJSFC AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (amounts in millions of Russian Rubles, unless otherwise stated) 76 Corporate notes – As at 31 December 2022 and 2021 , the Group’s notes con sisted of the following: Interest rate (as of 31 December 31 December 31 December Currency 2022) 2022 2021 MTS International 2023 USD 5.00% 23,187 32,800 MTS Notes 2025 RUB 8.00% 14,993 14,990 MTS Notes 2022 RUB 7.70% - 14,991 MTS Notes 2023 RUB 6.85% 14,992 14,982 MTS Notes 2027 RUB 6.60% 14,980 14,975 Sistema PJSFC March 2027 RUB 17.00% 3,917 10,607 Sistema PJSFC May 2030 RUB 6.60% 14,717 14,741 MTS Notes 2026 RUB 7.90% 9,998 9,999 MTS Notes 2022 RUB 9.00% - 10,000 Sistema PJSFC July 2030 RUB 6.35% 9,197 9,218 Sistema PJSFC January 2028 RUB 6.90% 9,937 9,943 MTS Notes 2022 RUB 6.45% - 9,994 MTS Notes 2025 RUB 7.25% 9,885 9,882 MTS Notes 2024 RUB 8.70% 9,834 9,831 Sistema PJSFC February 2029 RUB 11.30% 1,024 3,800 Sistema PJSFC August 2030 RUB 6.70% 9,854 9,858 Sistema PJSFC November 2026 RUB 6.85% 9,619 9,624 Sistema PJSFC October 2029 RUB 7.85% 9,684 9,689 Sistema PJSFC March 2029 RUB 9.90% 1,856 9,641 Sistema PJSFC July 2029 RUB 9.40% 9,849 9,849 Sistema PJSFC October 2026 RUB 6.35% 6,210 6,181 Segezha Group JSC January 2023 RUB 7.10% 9,384 9,605 Segezha Group JSC October 2036 RUB 9.85% 10,000 10,000 Segezha Group JSC November 2036 RUB 9.70% 9,914 10,000 Segezha Group JSC January 2037 RUB 10.90% 9,000 - Segezha Group JSC May 2037 RUB 11.00% 8,054 - Segezha Group JSC July 2037 RUB 10.75% 9,738 - Segezha Group JSC September 2025 RUB 10.75% 5,000 - Segezha Group JSC April 2024 RUB 10.83% 10,000 - Segezha Group JSC October 2037 CNY 4.15% 4,947 - MTS Notes 2023 RUB 6.50% 9,986 9,923 MTS Notes 2022 RUB 5.50% - 9,995 MTS Notes 2024 RUB 8.60% 7,494 7,491 MTS Notes 2027 RUB 6.60% - 6,983 Sistema PJSFC November 2030 RUB 6.10% 4,742 4,748 MTS Notes 2022 RUB 8.40% - 4,997 MTS Notes 2026 RUB 6.60% 4,993 4,992 Sistema PJSFC November 2030 RUB 6.75% 14,000 14,000 Sistema PJSFC September 2025 RUB 17.00% 3,613 4,817 Sistema PJSFC February 2031 RUB 6.90% 4,813 4,819 Sistema PJSFC February 2031 RUB 7.35% 12,049 12,055 Sistema PJSFC April 2031 RUB 8.20% 9,913 9,912 Sistema PJSFC June 2031 RUB 8.40% 14,852 14,851 Sistema PJSFC September 2031 RUB 8.20% 15,000 15,000 Sistema PJSFC November 2031 RUB 9.95% 4,294 4,294 Business Nedvizhimost August 2024 RUB 10.45% 3,340 3,330 Binnopharm Group November 2036 RUB 9.90% 3,000 3,000 Binnopharm Group July 2037 RUB 10.35% 2,724 - MTS Notes 2031 RUB 6.25% 78 78 Sistema PJSFC February 2028 RUB 9.00% 244 244 MTS Notes 2024 RUB 6.50% 4,333 4,172 Etalon-Finance February 2023 RUB 7.95% 4,073 - Etalon-Finance September 2026 RUB 9.10% 9,967 - MTS Notes 2024 RUB 8.30% 19,960 - Sistema PJSFC November 2032 RUB 10.00% 9,856 - MTS Notes 2027 RUB 6.60% 6,986 - MTS Notes 2025 RUB 11.69% 9,962 - MTS Notes 2026 RUB 11.75% 9,952 - MTS Notes 2026 RUB 9.65% 9,863 - MTS Notes 2024 RUB 8.40% 14,007 - Other - 10 Total 473,864 414,911 SISTEMA PJSFC AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (amounts in millions of Russian Rubles, unless otherwise stated) 77 The Group has an unconditional obligation to repurchase certain notes at par value if claimed by the noteholders subsequent to the announcement of the sequential coupon. Such notes are disclosed maturing in the reporting period when the demand for repurchase could be submitted, irrespective of the Group’s expectations about the intentions of the noteholders. Sistema PJSFC February 2029 February 2026 Sistema PJSFC Semtember 2025 April 2023 Sistema PJSFC March 2027 March 2023 Sistema PJSFC March 2029 September 2025 Sistema PJSFC November 2030 March 2023 Sistema PJSFC July 2030 April 2023 Sistema PJSFC July 2029 July 2023 Sistema PJSFC October 2026 November 2023 Sistema PJSFC February 2031 November 2023 Binnopharm Group November 2036 November 2023 Binnopharm Group July 2037 July 2024 Sistema PJSFC November 2026 February 2024 Sistema PJSFC May 2030 May 2024 Sistema PJSFC February 2028 August 2024 Sistema PJSFC August 2030 September 2024 Sistema PJSFC October 2029 October 2024 Segezha Group JSC October 2036 November 2024 Sistema PJSFC February 2031 February 2025 Sistema PJSFC November 2030 June 2025 Sistema PJSFC January 2028 July 2025 MTS Notes 2031 February 2026 Sistema PJSFC November 2031 February 2026 Sistema PJSFC April 2031 May 2026 Sistema PJSFC June 2031 June 2026 Segezha Group JSC November 2036 November 2026 Sistema PJSFC September 2031 December 2026 Sistema PJSFC November 2032 December 2025 Segezha Group JSC January 2037 January 2024 Segezha Group JSC May 2037 November 2023 Segezha Group JSC July 2037 February 2026 Segezha Group JSC October 2037 November 2025 Covenants – Loans and notes payable by the Group are subject to various restrictive covenants and events of default, which permit lenders to demand accelerated repayment of debt. Such covenants and events include noncompliance with certain financial ratios, cancellation of principal telecom licenses, significant court rulings, encumbrances and confiscation of certain assets and other material adverse changes. As at 31 December 2022 and 2021, the Group had long-term debt denominated in Russian rubles, presented as part of current liabilities in the consolidated statement of financial position for the following reasons: 2022 2021 Violation of other non-financial restrictive conditions 4,969 10,685 Total 4,969 10,685 Assets pledged as security – As at 31 December 2022 and 2021, land and buildings with carrying amounts of RUB 32,746 million and RUB 23,399 million, respectively, have been pledged to secure borrowings of the Group. The freehold land and buildings have been pledged as security for bank loans under a mortgage. The Group is not allowed to pledge these assets as security for other borrowings or to sell them to another entity. As at 31 December 2022 and 2021, other assets including inventories and deposits with carrying amounts of RUB 119,408 million, RUB 9,105 million respectively have been pledged to secure borrowings of the Group. SISTEMA PJSFC AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (amounts in millions of Russian Rubles, unless otherwise stated) 78 Stakes in some subsidiaries and affiliates of Segezha, Steppe, Hospitality assets, Etalon and others have been pledged to secure borrowings of the Group. 25. LEASE LIABILITIES AND RIGHT-OF-USE ASSETS The Group assesses whether a contract is or contains a lease at inception of a contract. The Group recognizes a right-of-use asset and a corresponding lease liability with respect to all lease agreements (including sub-lease and lease of intangible assets), which conveys the right to control the use of identified assets for a period of time in exchange for consideration, except for short-term leases (with lease term of 12 months or less). For these leases, the Group recognizes the lease payments as operating expense on a straight-line basis over the term of the lease. When identifying the lease, the Group uses practical expedient of IFRS 16 permitting the lessee not to separate non-lease components of the contract and, instead, to account for any lease and associated non-lease components as a single arrangement. The lease liability is initially measured at the present value of the lease payments that are not paid at the commencement date, discounted by using the incremental borrowing rate of the respective companies of the Group. The following table presents a summary of net book value of right-of-use assets: 31 December 31 December 2022 2021 Sites for placement of network and base station equipment 83,042 91,566 Land and buildings 112,131 114,141 Other 6,391 4,773 Rights-of-use assets, net 201,564 210,480 Depreciation of the right-of-use assets for the year ended 31 December 2022 and 2021, included in the depreciation and amortisation of fixed assets, intangible assets and the right-of-use assets in the accompanying consolidated statement of profit or loss. Amounts of RUB 0 million and RUB 0 million, respectively, were recognised as part of the financial result from discontinued operations in the accompanying consolidated statement of profit or loss. Depreciation of the right-of-use assets included in depreciation and amortisation expense in the accompanying consolidated statement of profit or loss was as follows: 2022 2021 Sites for placement of network and base station equipment 11,600 11,448 Land and buildings 14,851 11,516 Other 160 103 Depreciation charge, total 26,611 23,067 Additions to right-of-use assets during the year ended 31 December 2022 amounted to 19,941 million (including RUB 7,975 million through acquisitions within business combinations) and for the year ended 31 December 2021 amounted to RUB 65,231 million. The main additions of right-of-use assets in 2022 relate to MTS, Segezha, Steppe and Medsi. SISTEMA PJSFC AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (amounts in millions of Russian Rubles, unless otherwise stated) 79 Interest expenses on lease obligations for the year ended 31 December 2022 and 2021, were included in finance expenses in the accompanying consolidated statement of profit or loss. Wherein amounts of RUB 0 million and RUB 0 million, respectively, were recognised as part of the financial result from discontinued operations in the accompanying consolidated statement of profit or loss. The following table presents expenses related to lease, recognised in the consolidated statement of profit or loss for: 2022 2021 Depreciation of right-of-use assets 26,611 23,067 Interest expense on lease liabilities 16,818 13,887 Expenses relating to variable lease payments not included in the measurement of the lease liability 11,437 10,721 The following table presents future lease payments under lease arrangements together with the present value of the net lease payments as at 31 December 2022 and 2021: 31 December 31 December 2022 2021 Lease payments, including: Less than 1 year 41,119 36,872 From 1 to 5 years 120,831 120,480 Over 5 years 158,083 159,653 Total lease payments 320,033 317,005 Less amount representing interest (134,203) (126,432) Present value of net lease payments, including: Less than 1 year 29,304 23,335 From 1 to 5 years 80,289 84,225 Over 5 years 76,237 83,013 Total present value of net lease payments 185,830 190,573 Less current portion of lease obligations (29,303) (23,335) Non-current portion of lease obligations 156,527 167,238 Total cash outflows for leases for the year ended 31 December 2022 amounted to RUB 39,475 million (31 December 2021: RUB 32,950 million), including interest paid in amount of RUB 16,511 million (31 December 2021: RUB 13,269 million). 26. BANK DEPOSITS AND LIABILITIES Bank liabilities primarily consist of customer accounts and deposits. These liabilities are initially measured at fair value, net of transaction costs. Liabilities are subsequently measured at amortised cost using the effective interest method and classified based on their contractual maturity. SISTEMA PJSFC AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (amounts in millions of Russian Rubles, unless otherwise stated) 80 Bank deposits and liabilities as at 31 December 2022 and 2021 consisted of the following: 2022 2021 Customer accounts 221,562 213,236 Bank loans received 10,984 21,430 Debt securities issued 10,481 5,581 Other liabilities 1,980 2,303 245,007 242,550 Less: amounts maturing within one year (232,610) (225,795) Total bank deposits and liabilities, net of the current portion 12,397 16,755 27. OTHER FINANCIAL LIABILITIES Other financial liabilities as at 31 December 2022 and 2021 consisted of the following: 31 December 31 December 2022 2021 Payables for the acquisition of a stakes and shares 33,032 26,901 Obligations under swap agreements, repo transcations and put option agreements 9,763 9,932 Obligation in relation to preferred shares of subsidiary 2,000 2,000 Other 5,036 9,178 Non-current 25,050 15,972 Current 24,781 32,039 Total other financial liabilities 49,831 48,011 In 2022, payables for the acquisition of LLC Inter Forest Rus decreased by RUB 21,017 million (Note 6). As at 31 December 2022, payables for the acquisition of a stakes and shares mainly represented by obligations for acqusition of 88% share capital of LLC “ ZIL-YUG ” amounted to RUB 23,168 million. 28. PROVISIONS Provisions primarily consist of provisions related to employees’ bonuses and other rewards, decommissioning and restoration obligations. Provisions are recognised when the Group has a present obligation (legal or constructive) as a result of past event, it is probable that the Group will be required to settle that obligation and a reliable estimate can be made of the amount of obligation. Provisions are measured at the management’s best estimate of the expenditure required to settle the obligation at the reporting date and are discounted to present value where the effect is material. SISTEMA PJSFC AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (amounts in millions of Russian Rubles, unless otherwise stated) 81 Provisions as at 31 December 2022 and 2021 consisted of the following: 2022 2021 Employees’ bonuses and other rewards 19,491 13,741 Provisions for decomissioning and restoration 5,096 7,490 Tax provisions other than for income tax 844 47 Other 10,461 10,004 Total 35,892 31,282 Current 27,447 23,256 Non-current 8,445 8,026 Employees’ Tax Provisions bonuses and Provisions provisions for litigation other for decomis- other than and rewards sioning income tax Other Total Balance as of 1 January 2021 (9,246) (5,273) (792) (8,689) (24,000) Additional provisions recognized (19,204) (2,329) (165) (5,870) (27,568) Payments 14,169 31 298 2,946 17,444 Unwinding of discount and effect of changes in the discount rate 4 (145) - - (141) Unused amounts reversed 713 226 820 1,565 3,324 Other (18) - (1) 47 28 Purchases (159) - (207) (3) (369) Balance as of 31 December 2021 (13,741) (7,490) (47) (10,004) (31,282) Additional provisions recognized (25,427) (2,118) (1,023) (9,805) (38,373) Payments 19,494 68 163 7,240 26,965 Unwinding of discount and effect of changes in the discount rate - (173) - - (173) Unused amounts reversed 205 4,597 180 134 5,116 Disposals (Note 5) 138 - - 2,942 3,080 Other - 20 - 6 26 Purchases (160) - (117) (974) (1,251) Balance as of 31 December 2022 (19,491) (5,096) (844) (10,461) (35,892) SISTEMA PJSFC AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (amounts in millions of Russian Rubles, unless otherwise stated) 82 29. EARNINGS/(LOSS) PER SHARE Earnings/(loss) per share is the amount of earning/(loss) for the year attributable to ordinary shares of the Company divided by the weighted average number of ordinary shares outstanding during the year. The earnings/(loss) and weighted average number of ordinary shares used in the calculation of basic and diluted earnings/(loss) per share are as follows: 2022 2021 Earning/(loss) for the year from discontinued operations attributable to shareholders of Sistema PJSFC 4,793 (11,186) Earning for the year from continuing operations attributable to shareholders of Sistema PJSFC 14,612 27,943 Earnings used in the calculation of basic and diluted earnings per share 19,405 16,757 Weighted average number of ordinary shares for the purposes of basic and diluted earnings per share 9,381,822,364 9,466,994,541 Earnings/(loss) per share – basic and diluted 2.07 1.77 From continuing operations 1.56 2.95 From discontinued operations 0.51 (1.18) 30. CAPITAL AND FINANCIAL RISK MANAGEMENT Capital risk management – The Group manages its capital to ensure that entities of the Group will be able to continue as a going concern while maximising the return to the shareholders through the optimisation of the debt and equity balance. The capital structure of the Group consists of net loans and borrowings (loans and borrowings offset by cash and cash equivalents) and equity of the Group. The Group’s policy is to maintain a stron g capital base to maintain investor, creditor and market confidence and to sustain future development of the business. The Group manages its capital structure and adjusts it, in light of changes in economic conditions. The Group may sell assets to reduce debt, maintain or adjust the capital structure. The Board of Directors monitors the net loans and borrowings to OIBDA ratio. Since these are non- IFRS measures, the Group’s definition of OIBDA and net borrowings may differ from that of other companies. The OIBDA represents operating profit before depreciation and amortizations. The OIBDA is non-IFRS measure and should be considered as an addition setting, but not as a substitute. The Group’ s management consider that this measure is useful for users, as it is an indicator of the sustainability and efficiency of the Group’ s operations, including the Group ’ s ability to finance capital expenditures, business acquisitions and other investments, as well as the ability to attract debt financing and service debt. SISTEMA PJSFC AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (amounts in millions of Russian Rubles, unless otherwise stated) 83 Consolidated net debt is defined as consolidated long-term and short-term loans and borrowings less cash and cash equivalents and bank deposits. The Group’ s management consider that information about consolidated net debt provides useful information for users of financial statements, as this measure is part of the management of liquidity, financial flexibility, capital and its structure. The Group’ s Net debt to OIBDA ratio was as follows: 2022 2021 Net debt 926,664 768,934 OIBDA 309,152 288,888 Net debt to OIBDA ratio 3.00 2.66 The Group is subject to certain externally imposed capital requirements and restrictions that are incorporated into the management of capital. The CBR requires that banks comply with the minimum capital adequacy ratio of 8% calculated based on statutory standalone financial statements. The Group’s banking activities met the requirements established by the CBR. As at 31 December 2022 and 2021, capital adequacy ratio was 16.07% and 12.54% respectively. Financial risk management objectives – The Management Board has overall responsibility for the establishment and ongoing management of the Group’s risk management framework, and the implementation and operation of the Board’s policies are handled by the Management Board. The Management Board monitors and manages the financial risks relating to the operations of the Group through internal management reports, which analyses exposures by degree and magnitude of risks. These risks include market risk (including foreign currency risk, interest rate risk and other price risk), liquidity risk and credit risk. Foreign currency risk – Foreign currency risk is the risk that the financial results of the Group will be adversely impacted by changes in exchange rates to which the Group is exposed. The Group undertakes certain transactions denominated in foreign currencies and is primarily exposed to the US Dollar and Euro. The Group manages its net exposure to foreign exchange risk by balancing both financial assets and financial liabilities denominated in Russian Ruble, US Dollar and Euro and by using certain derivative instruments (Note 31). The carrying amounts of the Group’s foreign currency denominated monetary assets and monetary liabilities (excluding hedged items) at the year-end are as follows: 2022 2021 2022 2021 US Dollar 46,931 63,395 50,834 34,497 Euro 21,387 39,940 11,187 5,081 Liabilities Assets SISTEMA PJSFC AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (amounts in millions of Russian Rubles, unless otherwise stated) 84 The table below details the Group’s sensitivity to the strengthening of the US Dollar and Euro against the Russian Ruble. This analysis assumes that all other variables, in particular interest rates, remain constant. This analysis is based on foreign currency exchange rate variances that the Group considered to be reasonably possible at the end of the reporting period. The analysis was applied to monetary items at the year-end denominated in the respective currencies. Increase in US Dollar and Euro Decrease in profit before tax 2022 30% 1,889 2021 50% 31,260 The effect of a corresponding strengthening of the Russian Ruble against the US Dollar and EUR is equal and opposite. Interest rate risk – Interest rate risk arises from the possibility that changes in interest rates will affect finance costs. The Group is exposed to interest rate risk because entities in the Group borrow funds at both fixed and floating interest rates. The risk is managed by the Group by maintaining an appropriate mix between fixed and floating rate borrowings and by using certain derivative instruments (Note 31). A change of floating rates by 1% applied to the borrowings (excluding hedged items) would result in an increase in the Group's future interest expense by RUB 3,787 million. Fixed rate loan agreements often stipulate creditor’s right to increase interest rates under certain circumstances, including increase of the key rate of the Central Bank of Russia. Therefore, in addition to the effect from changes in floating interest rates, the Group is also exposed to interest rate risk arising from these agreements. Other price risks – Price risk is the risk that the value of a financial instrument will fluctuate as a result of changes in market prices. These changes may be caused by factors specific to the individual security or its issuer or factors affecting all securities traded in the market. The sensitivity analysis below has been determined based on the exposure to price risks at the end of the reporting period. Sensitivity analysis was prepared on pre-tax basis. If prices of securities as at the year-end had been higher/lower: Change in prices Profit before tax increase Other comprehensive income increase 2022 30% 2,992 4,350 2021 30% 10,282 2,828 The effect of a corresponding decrease in prices of securities is equal and opposite. Liquidity risk – Liquidity risk is the risk that the Group will not be able to settle all its liabilities as they fall due. SISTEMA PJSFC AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (amounts in millions of Russian Rubles, unless otherwise stated) 85 The Group’s liquidity position is monitored and managed at the level of operating segments. The Group manages liquidity risk by continuously monitoring forecasted and actual cash flows, by matching the maturity profiles of financial assets and liabilities and by maintaining available credit facilities. As at 31 December 2022, the schedule of repayments of financial liabilities (except for lease liabilities, presented in Note 25) of the Group for the next five years and thereafter was as follows: <1 year 1-2 years 2-3 years 3-4 years 4-5 years >5 years Loans and borrowings 298,846 272,328 314,876 147,081 26,888 1,046 Accounts payable 137,508 - - - - - Bank deposits and liabilities 232,610 8,678 1,860 1,240 619 - Other financial liabilities 24,781 20,903 - 164 3,983 - Total financial liabilities 693,745 301,909 316,736 148,485 31,490 1,046 For day-to-day liquidity requirements the Group had unused credit facilities of RUB 673,134 million as 31 December 2022 (31 December 2021: RUB 485,128 million). Credit risk – Credit risk refers to the risk that a counterparty will default on its contractual obligations resulting in a financial loss to the Group. The Group is exposed to credit risks on cash and cash equivalents, deposits, derivatives and certain other financial instruments with financial institutions, loans and receivables carried at amortised cost and debt securities. The determination of whether a financial asset has experienced a significant increase in credit risk is based on an assessment of the probability of default, which is made at least quarterly, incorporating external credit rating information as well as internal information on the credit quality of the financial asset. For debt instruments that are not receivables from financial services, a significant increase in credit risk is assessed mainly based on past-due information. For contract assets, trade and other receivables, a simplified approach is applied whereby ECL are initially measured over the lifetime of the instrument. Financial assets in financial institutions – the Group maintains mixture of cash and cash equivalents, deposits, derivatives and certain other financial instruments in financial institutions. These financial institutions are located in different geographical regions and the Group’s policy is designed to limit exposure to any one institution. As part of its risk management processes, the Group performs periodic evaluations of the relative credit standing of the financial institutions. As at 31 December 2022 and 2021, the Group has a significant cash balances, cash equivalents and deposits in the following financial institutions: 31 December 31 December 2022 2021 The Central bank the Russian Federation 7,094 9,721 The Central bank of Luxemburg - 10,902 RuААА (RAEX) 19,829 10,430 RuAAA (ACRA) 10,826 1,745 RuAA (ACRA) 6,328 - Total 44,077 32,798 SISTEMA PJSFC AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (amounts in millions of Russian Rubles, unless otherwise stated) 86 Bank loans to customers and interbank loans due to the banks – MTS Bank performs daily monitoring of future expected cash flows on clients’ and banking operations, which is a part of assets/liabilities management process. The credit risk exposure is monitored on a regular basis to ensure that the credit limits and credit worthiness guidelines established by the MTS Bank’s risk management policy are not breached. The Group structures the levels of credit risk it undertakes by placing limits on the amount of risk accepted in relation to one borrower, or group of borrowers, and to geographical segments. Other loans and receivables carried at amortised cost – Concentrations of credit risk with respect to loans and trade receivables are limited given that the Group’s customer base is large and unrelated. Management believes there is no further credit risk provision required in excess of ECL allowance. 31. DERIVATIVE INSTRUMENTS The Group uses derivative instruments, including interest rate and foreign currency swaps, to manage foreign currency and interest rate risk exposures. The Group measures derivatives at fair value and recognizes them either other current or other non-current financial assets or liabilities in the consolidated statement of financial position. Cash flows from derivatives are classified according to their nature. The Group reviews related fair value hierarchy classifications on a quarterly basis. The fair value measurement of the Group’s derivative instruments is based on the observable yield curves for similar instruments. Gain and losses from changes in the fair value are recorded immediately in profit or loss. Assets and liabilities related to multiple derivative contracts with one counterparty are not offset by the Group. Cross-currency interest rate swap agreements – The Group has entered into several cross-currency interest rate swap agreements. The contracts are designated to manage the exposure to changes in currency exchange rate. The contracts assumed periodic exchange of principal and interest payments from RUB-denominated amounts to USD- and Euro-denominated amounts at a specified rate. The rate was determined by the market spot rate upon issuance. Cross-currency interest rate swap contracts mature in 2023-2024. In aggregate the Group entered into cross-currency interest rate swap agreements designated to manage the exposure to changes in currency exchange rate for 0 and 65 % of the Group’s bank loans denominated in USD and EUR outstanding as at 31 December 2022 and 31 December 2021 respectively. The notional amounts related to currency derivative instruments amounted to RUB 0 million and 39,788 million as at 31 December 2022 and 2021 respectively. The Group has entered into currency forward and swaps agreements to minimize the foreign currency risk exposure for operating activities. The contracts assumed the purchase or sale of the agreed amount of currency at a specified exchange rate and on a specific date. The rate was determined by the market spot rate upon issuance. As the result of currency forward and swap agreements, unfulfilled as at 31 December 2022 and 2021, the Group recognised gain RUB 1,446 million and RUB 635 million loss in the consolidated statement of profit or loss for the 2022 (loss RUB 83 million in the consolidated statement of profit or loss for the 2021). SISTEMA PJSFC AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (amounts in millions of Russian Rubles, unless otherwise stated) 87 The notional amounts of currency forward and swap instruments, unfulfilled as at 31 December 2022 and 2021 was RUB 10,873 million and RUB 9,993 million, respectively. Fixed-to-variable interest rate swap agreements – The Group’s notes and bank loans denominated in Russian Rubles bear primarily fixed interest rates. To reduce the cost of debt servicing, the Group entered into swap agreements. In aggregate the Group entered into fixed-to-variable interest rate swap agreements manage of the debt related to 5 % of the Group’s notes and bank loans with fixed rates outstanding as at 31 December 2022 (2021: 6%). The notional amounts related to interest rate derivative instruments amounted to RUB 35,000 million as at 31 December 2022 (2021: RUB 39,788 million). SISTEMA PJSFC AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (amounts in millions of Russian Rubles, unless otherwise stated) 88 32. FAIR VALUES The following fair value hierarchy table presents information regarding Group’s financial assets and liabilities measured at fair value on a recurring basis at 31 December 2022 and 2021. Fair value measurements are categorised into Level 1, 2 or 3 based on the degree to which the inputs to the fair value measurements are observable and the significance of the inputs to the fair value measurement in its entirety. Level 1 classification comprises financial instruments where fair value is determined by unadjusted quoted prices in active markets for identical assets or liabilities that the Group can access at the measurement date; Level 2 – from inputs, other than quoted prices included within Level 1, that are observable for the asset or liability, either directly or indirectly; Level 3 – from unobservable inputs. Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total Financial assets At fair value through other comprehensive income 18,124 2,008 - 20,132 11,782 - 1,022 12,804 Deferred consideration - - 473 473 - - 1,867 1,867 At fair value through profit or loss 9,974 46,925 26,109 83,008 34,274 11,974 38,330 84,578 28,098 48,933 26,582 103,613 46,056 11,974 41,219 99,249 Financial liabilities Derivative instruments - (18) - (18) - (4,150) - (4,150) Deferred considerations and others - - (1,220) (1,220) - - (188) (188) Liabilities under put option agreements - - (2,780) (2,780) - - - - - (18) (4,000) (4,018) - (4,150) (188) (4,338) 31 December 2022 31 December 2021 The fair value of financial assets and liabilities categorised into Level 2 is based on the observable data about quotations on the active market for similar assets, and is an estimate of the amount, taking into account the additional discount that the Group would receive when selling the asset or by which it would reduce the financial liability SISTEMA PJSFC AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (amounts in millions of Russian Rubles, unless otherwise stated) 89 The fair value of financial assets and liabilities categorized into Level 3 is primarily measures using the discounted cash flows technique. The unobservable inputs to the models include assumptions regarding the future financial performances of the investee, its risk profile, and economic assumptions regarding the industry and jurisdiction in which the investee operates. During the year ended 31 December 2022, Eurobonds of Russian issuers held by Group, accounted for at fair value, in amount of RUB 2,008 million were transferred in the hierarchy level from Level 1 to Level 2 due to the Moscow Exchange suspension of main trading mode for these securities. There were no transfers between levels of inputs within the hierarchy for the years ended 31 December 2021. During the year ended 31 December 2022, corporate, bank and government debt securities held by MTS Bank, accounted for at fair value, in amount of RUB 22,544 million as at 31 December 2021, were transferred from the category “ financial assets at fair value through profit or loss ” to the “ financial assets at fair value through other comprehensive income ” due to the change in investment policy, reviewed to include both sale and receipt of contractual cash flows for the reclassified securities. At the date of reclassification, the fair value of the securities remained unchanged. As at 31 December 2022, the fair value of reclassified securities amounted to RUB 20,132 million. There were no transfers between the accounting categories of financial instruments for the years ended 31 December 2021. The carrying value of the Group’s financial instruments accounted for at amortized cost approximates their fair value due to their short-term nature and market interest rates, except for MTS bank deposits and loans to customers and also Group’s borrowings, as disclosed in the table below : Carrying value Fair value Carrying value Fair value Financial assets Bank deposits and loans to 227,988 230,395 203,440 208,127 customers Financial liabilities Loans and borrowings 1,061,065 1,038,704 850,817 839,849 31 December 2022 31 December 2021 SISTEMA PJSFC AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (amounts in millions of Russian Rubles, unless otherwise stated) 90 The table below presents the change in fair value of financial assets and liabilities of Level 3 as at 31 December 2022 and 2021. Liabilities under Other Other put option financial financial agreements assets liabilities Total Balance as of 1 January 2021 (55) 32,748 (1,067) 31,626 Total gains/(losses): - in profit or loss 55 18,996 392 19,443 - in other comprehensive income - (650) - (650) Reclasses to other categories - (10,085) - (10,085) Disposals - (3,194) - (3,194) Repayments - (880) 487 (393) Purchases - 4,284 - 4,284 Balance as of 31 December 2021 - 41,219 (188) 41,031 Total gains/(losses): - in profit or loss 83 (139) (411) (467) - in other comprehensive income - 1,446 - 1,446 Impairment - (1,866) - (1,866) Disposals - (15,309) - (15,309) Disposals of business line - 473 - 473 Additions (2,863) 50 (621) (3,434) Reclassification to associates - (990) - (990) Purchases - 1,698 - 1,698 Balance as of 31 December 2022 (2,780) 26,582 (1,220) 22,582 Net unrealized gains and losses of Level 3 assets and liabilities resulting from fair value measurements were recognised in the following amounts: 2022 2021 Net unrealized (losses)/gains of Level 3 assets (1,446) 385 Net unrealized (losses)/gains of Level 3 liabilities (3,657) 391 (5,103) 776 SISTEMA PJSFC AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (amounts in millions of Russian Rubles, unless otherwise stated) 91 33. RELATED PARTY TRANSACTIONS The Group has a number of related parties including shareholders holding more than 20% of the Company’s voting rights and entities under common control, associates and joint ventures, and key management personnel. Trading transactions – The Group’s trading transactions with related parties that are not members of the Group comprise sales and purchases of goods and services in the normal course of business. The counterparties for these transactions are predominantly associates and joint ventures. During the year ended 2022 sales to related parties comprised RUB 5,483 million (2021: RUB 1,634 million), purchases from related parties comprised RUB 2,723 million (2021: RUB 5,554 million). As at 31 December 2022, trade balances receivable from and payable to related parties comprised RUB 6,416 million and RUB 3,474 million, respectively (31 December 2021: RUB 6,935 million and RUB 1,936 million). Bank loans to related parties as at 31 December 2022 are amounted to RUB 825 million (31 December 2021: RUB 4,665 million). Debt obligations to related parties as at 31 December 2022 are RUB 9,794 million (31 December 2021: RUB 8,016 million). Dividends received – In 2022, the Group received dividends from MTS Belarus in the amount of RUB 4,545 million (2021: RUB 4,034 million), Etalon Group in the amount of RUB 1,076 million in 2021 before obtaining control (Note 6). Financial transactions – The Group’s financial transactions with related parties primarily comprise loans, deposits and other debt instruments issued to or by the Group entities. At 31 December 2022 and 2021, amounts owed by or to related parties under such arrangements are as follows: 31 December 31 December 31 December 31 December 2022 2021 2022 2021 Shareholders holding more than 20% of the Company’s voting rights and Entities under common control 12,570 31,143 3,992 26,897 Key management personnel - - 1,328 5,392 Other related parties - - 6,034 11,859 Amounts owed by related parties Amounts owed to related parties Finance costs related to such transactions with related parties and recognised in the consolidated statement of profit or loss in 2022 amounted to RUB 106 million (2021: RUB 1,171 million). Payments and transfers from other financial transactions with related parties for the twelve months ended 31 December 2022 amounted to RUB 7,234 million (2021: RUB 3,496 million). SISTEMA PJSFC AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (amounts in millions of Russian Rubles, unless otherwise stated) 92 Compensation of key management personnel – In 2022 and 2021, the aggregate compensation for key management personnel, being the members of the Company’s Board of Directors and Management Board was as follows: 2022 2021 Short-term benefits 4,387 4,643 Share-based payments 204 1,486 4,591 6,129 34. SUBSIDIARIES Details of the Group’s most material subsidiaries at the end of the year are as follows: Significant entities Short name Principal activity 2022 2021 Mobile TeleSystems PJSC(1) MTS Telecommunications 49.93% 50.58% Segezha Group PJSC Segezha Group Pulp and paper 62.17% 62.17% Etalon Group Plc(1) Etalon Development 48.80% 29.79% Medsi Group JSC Medsi Healthcare services 95.49% 95.49% Bashkirian Power Grid Company JSC BPGC Energy transmission 90.96% 90.96% Agroholding Steppe JSC Steppe Agriculture 89.72% 91.26% Binnopharm Group LLC Binnopharm Group Pharmaceuticals 72.15% 75.32% Beneficial ownership as of 31 December (1) The Group consolidates MTS and Etalon based on IFRS 10 “ Consolidated Financial Statements ” due to the presence of the largest block of shares and a high dispersion of external shareholders. The table below shows details of non-wholly owned subsidiaries of the Group that have material non- controlling interests: Principal place of Name of subsidiary business 2022 2021 2022 2021 MTS Russia 16,278 31,633 (5,237) 4,286 Segezha Group Russia 2,279 3,229 15,442 17,015 Etalon Russia 4,216 - 50,520 - Accumulated non-controlling interests Profit allocated to non-controlling interests Summarised financial information in respect of each of the Group’s subsidiaries that has material non-controlling interests is set out below. The summarised financial information below represents amounts before intragroup eliminations. The consolidated financial information presented below is indicative of pre-exclusion of intra-group transactions. SISTEMA PJSFC AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (amounts in millions of Russian Rubles, unless otherwise stated) 93 2022 2021 2022 2021 2022 2021 Current assets 300,883 263,299 64,628 54,583 226,941 n/a Non-current assets 782,047 752,518 163,462 159,365 21,104 n/a Total assets 1,082,930 1,015,817 228,090 213,948 248,045 n/a Current liabilities 551,345 473,364 70,126 76,967 68,989 n/a Non-current liabilities 535,202 527,851 116,666 90,789 104,867 n/a Total liabilities 1,086,547 1,001,215 186,792 167,756 173,856 n/a Equity attributable to shareholders of Sistema (4,130) 5,480 26,564 29,150 23,654 n/a Non-controlling interests 513 9,123 15,490 17,042 50,535 n/a Revenue 541,749 534,403 106,766 92,442 80,556 n/a Expenses (508,314) (470,134) (100,714) (77,205) (67,555) n/a Profit for the year 33,435 64,269 6,052 15,237 13,001 n/a Profit attributable to shareholders of Sistema 16,295 31,840 3,751 12,041 8,982 n/a Profit attributable to the non-controlling interests 17,140 32,429 2,301 3,196 4,019 n/a Other comprehensive income attributable to shareholders of Sistema 947 605 147 140 - n/a Other comprehensive income attributable to the non-controlling interests 949 592 - - - n/a Other comprehensive income for the year 1,896 1,197 147 140 - n/a Total comprehensive income attributable to shareholders of Sistema 17,243 32,445 3,898 12,181 8,982 n/a Total comprehensive income attributable to the non-controlling interests 18,088 33,021 2,301 3,196 4,019 n/a Total comprehensive income for the year 35,331 65,466 6,199 15,377 13,001 n/a 2022 2021 2022 2021 2022 2021 Dividends accrued to non-controlling interests 28,103 30,747 3,799 2,493 - n/a Net cash inflow/(outflow) from operating activities 190,592 142,579 2,259 13,068 (50,815) n/a Net cash (outflow)/inflow from investing activities (118,238) (116,165) (32,367) (50,473) 416 n/a Net cash (outflow)/inflow from financing activities (34,622) (71,214) 37,682 46,154 29,698 n/a Net cash inflow/(outflow) 37,702 (44,800) 7,574 8,749 (20,700) n/a MTS MTS Segezha Group Segezha Group Etalon (Note 6) Etalon (Note 6) 35. NON-CASH TRANSACTIONS The Group entered into the following non-cash investing and financing activities, which are not reflected in the consolidated statements of cash flows: 2022 2021 Additions to the right-of-use assets 11,732 29,393 Сapital expenditure liabilities (12,160) 5,402 Employee benefits 3,682 7,045 Deferred payment 5,731 26,579 Fair value of contingent consideration 621 60 Fair value of financial assets 993 1,958 . SISTEMA PJSFC AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (amounts in millions of Russian Rubles, unless otherwise stated) 94 36. RECONCILIATION OF LIABILITIES ARISING FROM FINANCING ACTIVITIES Cash flows Cash flows Disposal/ from from acquisition financing operating of Changes Other 1 January activities activities subsidiaries Currency in changes 31 December 2022 (i) (ii) (Note 5, 6) exchange equity (iii) 2022 Loans and borrowings 850,817 198,858 - 50,305 (10,313) - (29,345) 1,060,322 Capital transactions of subsidiaries - (2,254) - - - (49,518) 51,772 - Lease liability 190,571 (22,964) (16,511) 7,029 (400) - 28,105 185,830 Dividends payable 5,258 (20,807) - - - 32,739 800 17,990 Other financial liabilities 48,011 (4,631) - - - (143) 6,644 49,881 Total 1,094,657 148,202 (16,511) 57,334 (10,713) (16,922) 57,976 1,314,023 Cash flows Cash flows Disposal/ from from acquisition financial operation of Changes Other 1 January activities activities subsidiaries Currency in changes 31 December 2021 (i) (ii) (Note 5, 6) exchange equity (iii) 2021 Loans and borrowings 723,961 111,514 - 20,428 (2,243) - (2,843) 850,817 Capital transactions of subsidiaries - 31,680 - - - (54,677) 22,998 - Lease liability 165,574 (19,682) (13,269) 14,908 (8) - 43,047 190,571 Dividends payable 3,326 (35,557) - - - 37,489 - 5,258 Other financial liabilities 7,476 (21,194) - 22,126 - 5,425 34,177 48,011 Total 900,337 66,761 (13,269) 57,462 (2,251) (11,763) 97,379 1,094,657 Non-cash changes Non-cash changes (i) The cash flows from bank loans, loans from related parties and other borrowings make up the net amount of proceeds from borrowings and repayments of borrowings in the consolidated statement of cash flows. (ii) The cash flows are represented by lease liability interest paid. (iii) Other changes include new lease agreements, interest accruals and changes of other financial liabilities. SISTEMA PJSFC AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (amounts in millions of Russian Rubles, unless otherwise stated) 95 37. CONTINGENCIES AND COMMITMENTS Capital commitments – A capital commitment is a contractual obligation for future payments mainly for the acquisition of network infrastructure. These amounts are not recorded in the consolidated statement of financial position since the Group has not yet received goods or services from suppliers. As at 31 December 2022, the Group had capital commitments of RUB 53,553 million (31 December 2021: RUB 104,616 million), relating to the acquisitions of property, plant and equipment. Guarantees – As at December 31, 2022, the Group’s banking subsidiaries acted as guarantors for loans in the amount of RUB 18,626 million (31 December 2021: RUB 16,172 million), and also had commitments to provide loans under open credit lines in the amount of RUB 67,629 million (31 December 2021: RUB 37,327 million). Total commitments on loans and guarantees issued as at 31 December 2022 and 2021 are RUB 1,043 million and RUB 752 million, respectively. The Group will be required to make payments under these guarantees only if the respective debtors fail to meet their payment obligations. These guarantees would require payment by the Group in the event of default on payment by the respective debtor. Such guarantee contracts issued by the Group are initially measured at their fair values and are subsequently measured at the higher of the amount of the expected credit losses allowance, and the amount initially recognised less, where appropriate, cumulative income recognised in accordance with the revenue recognition policies. Telecommunication licenses – The management believes that as at 31 December 2022, the Group is in compliance with conditions of the used licenses. Restriction on transactions with the shares of BPGC – In 2014, in the course of litigation, which the Group is not a party to, the court imposed restrictions on transactions with the shares of BPGC owned by the Group. The restrictions do not limit the Group’s voting rights, rights to receive dividends or any other shareholders rights. Taxation – Russian legislation on taxation for business purposes continues to change rapidly. Management’s interpretation of such legislation as applied to the activity of the Group may be challenged by tax authorities. Recent events suggest that the tax authorities are taking a more assertive position in their interpretation of the legislation and assessments and as a result, it is possible that transactions and activities that have not been challenged in the past may be challenged. Fiscal periods generally remain open to tax audit by the tax authorities in respect of taxes for three calendar years preceding the year of tax audit. Under certain circumstances, reviews may cover longer periods. Management believes that it has provided adequately for tax liabilities in accordance with its interpretations of the Russian tax legislation. However, the tax authorities may have different interpretations, and the effects on the consolidated financial statements could be significant. Where uncertainty exists, the Group has accrued tax liabilities as management’s best estimate of the probable outflow of resources, which will be required to settle such liabilities. 31 December 2022, provisions for additional taxes and customs settlements comprised RUB 412 million (31 December 2021: RUB 414 million). The Group also assesses the following contingent liabilities in respect of additional tax settlements: 31 December 31 December 2022 2021 Contingent liabilities for additional taxes other than income tax 498 860 Contingent liabilities for additional income taxes 1,021 1,132 SISTEMA PJSFC AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (amounts in millions of Russian Rubles, unless otherwise stated) 96 In accordance with the rules on controlled foreign companies, undistributed profits of the Group foreign subsidiaries, qualifying as controlled foreign companies, should be included in the income tax base of the controlling entities in particular cases. Operating Environment – Emerging markets such as Russia are subject to different risks than more developed markets, including economic, political and social, and legal and legislative risks. Laws and regulations affecting businesses in Russia continue to change rapidly, tax and regulatory frameworks are subject to varying interpretations. The future economic direction of Russia is heavily influenced by the fiscal and monetary policies adopted by the government, together with developments in the legal, regulatory, and political environment. Starting from 2014, sanctions have been imposed in several packages by the U.S. and the E.U. on certain Russian officials, businessmen and companies. Because Russia produces and exports large volumes of oil and gas, its economy is particularly sensitive to the price of oil and gas on the world market. Due to the deterioration of the geopolitical situation since February 2022 the EU, the US, the UK and several other countries have introduced significant new sanctions and export controls on certain Russian individuals and entities. These include, among other things, restrictions targeting a number of large Russian financial institutions and the Central Bank of Russia, several companies and individuals, and technology export controls. Changes in these matters are highly unpredictable, occur quickly and often without warning, and are largely beyond the control of the Group. Current and future risks include, but are not limited to, the risk of limitation and complete closure of access to capital markets and the possibility of obtaining financing on commercially reasonable terms, the risk of decrease of fair value of financial assets, the risk of restrictions on payments and transactions with foreign counterparties, the risk of restrictions on the import of certain equipment and software and the export of finished products, as well as the risk of high volatility of the Russian ruble against other currencies, which could adversely affect the Group’ s investment program as a significant portion of its capital expenditures are closely linked to foreign currencies. The strengthening of the ruble against foreign currencies has a negative impact on the financial performance of the Group’ s export-oriented operating segments. In addition, Central Bank ’ s of Russia increase of its key rate to 20% on February 2022, impacted floating-rate credit facilities and consequently increased the Group’s finance costs. Further in 2022, the Central Bank of Russia has gradually decreased its key rate to 7.5% as at 31 December 2022. As at date of financial statement approval, the key rate did not change and remained at 7.5%. Violation of financial and non-financial covenants stipulated by loan agreements of the Group may result in banks’ demand of accelerated repayment of existing loans. The Group’ s management regularly analyzes the implementation of covenants. To date of this financial statement, the Group ’ s covenants stipulated by loan agreements have not been violated. The negative impact on the Russian economy is likely to increase the credit risk of many customers, leading to the need for recognition a significant additional amount of expected credit losses, which at the moment it is not possible to quantify. SISTEMA PJSFC AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (amounts in millions of Russian Rubles, unless otherwise stated) 97 The operations of MTS Bank, a company of the Group, are subject to risks that affect the ability of borrowers to repay amounts due to the Group, which may depend on the overall macroeconomic and business environment. Unfavorable changes in economic conditions could lead to a deterioration in the value of collateral for loans and other liabilities. Delisting Events In April 2022, Russian Federal Law No. 114-FZ, requiring Russian companies to terminate their depositary receipt programs, came into force. In May 2022, the Company has received permission to continue listing of GDRs outside Russia until 13 May 2023. In July 2022, MTS delisted its ADRs from the NYSE. In January 2023, the guaranteed conversion period for ADRs into ordinary shares of MTS PJSC in accordance with the depository agreement expired. In the opinion of MTS PJSC, the depository may continue to convert the ADR into ordinary shares and/or sell the unconverted shares to distribute the funds received among the holders of the ADR. The trading of the Ozon’s ADSs on the NASDAQ Global Select Market was suspended on 28 February 2022, and remains suspended on 31 December 2022. Under the conditions of the Company’s convertible bonds (the “ Bonds ” ), this trading suspension constituted a “ Delisting Event ” entitling the holders of the Bonds to exercise their rights to require redemption of their Bonds by way of giving the Ozon an irrevocable notice (the “ Delisting Event ” ). The bondholders, who exercised the rights to require redemption, forfeited their conversion rights under the Bonds. In September 2022, Ozon and the bondholders reached an agreement on the terms of the bond restructuring (“ Restructuring ” ). On 15 March 2023, Ozon received a notice from the NASDAQ about delisting the Ozon ’s ADSs from the Exchange. According to the Notice, the decision was made based on NASDAQ ’ s discretionary authority under Rule 5100 in light of the geopolitical circumstances affecting Russia and their potential impact on the company. On 21 March 2023, Ozon filed an appeal against NASDAQ ’ s decision to force the delisting of ADSs. According to the rules of the exchange, the company has the right to request a hearing of a special commission to appeal the exchange’ s decision, which it did. The hearing must be held within 45 days from the date of receipt of the request from the company. Actions to exclude the company from the listing must be suspended until the written decision of the commission is made. Sanctions In April 2022 the UK Government imposed asset freeze sanctions on Vladimir Evtushenkov. The sanctions imposed by the UK Government on Vladimir Evtushenkov are personal and do not target the Company and other Group companies. In February 2023, the US Office of Foreign Assets Control (OFAC) and the UK Office of Financial Sanctions Implementation (OFSI) designated MTS Bank as a sanctioned person pursuant to applicable sanctions regulations adopted by the US and the UK, respectively. Accordingly, MTS Bank became subject to so-called “ blocking ” (asset-freeze) sanctions maintained by the US and the UK. Among other matters, these sanctions require US and UK third parties, including banks, to block or freeze assets which MTS Bank holds with such parties or otherwise block the settlement of payments to or from MTS Bank and its counterparties. SISTEMA PJSFC AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (amounts in millions of Russian Rubles, unless otherwise stated) 98 Also, MTS Bank does not carry out settlements in US dollars, Turkish liras, Omani rials, Swiss francs, Pounds sterling. In addition, MTS Bank is currently unable to dispose of certain assets (balances on the Group’ s nostro accounts in South Korea). The current carrying amount of the blocked assets as of the date of issuance of these consolidated financial statements is RUB 9.6 billion. Currently, MTS Bank has filed an application for a license that will allow the transfer of balances on these accounts to the Russian jurisdiction, the probability of obtaining the license is assessed as high. The full impact and potential implications of the imposed sanctions on MTS Bank on the Group’ s operations, assets and liabilities cannot be reliably estimated at this time. MTS Bank Management believes it is taking the appropriate measures to mitigate the related negative effects. The above events require the business of the Group to adapt to a changing operating environment, characterized by significant uncertainty and having a significant impact on the Group and its operations. The actual future operating environment and its impact on the Group may differ from the management’ s current expectations. The management of the Group is currently assessing the possible impact of the above events and is taking all necessary measures to ensure the sustainability of the Group’ s operations. Legal proceedings – In the ordinary course of business, the Group is a party to various legal proceedings, and subject to claims, certain of which relate to the developing markets and evolving regulatory environments in which the Group operates. At 31 December 2022, management estimates the range of possible losses, if any, in all pending litigations or other legal proceedings being up to RUB 5,492 million. Litigation related to operations in Turkmenistan – In September 2017, the Group ’ s subsidiary in Turkmenistan MTS Turkmenistan or MTS-TM, suspended the provision of telecommunication services to its subscribers, due to the termination by Turkmen state-owned companies and state authorities of line rental, frequency allocation, interconnect, and other agreements necessary to provide telecommunication services. The license for the provision of telecommunication services on the territory of Turkmenistan was valid until July 2018. In July 2018, the Group filed a Request for Arbitration against the Sovereign State of Turkmenistan with the World Bank’ s International Center for Settlement of Investments Disputes ( “ ICSID ” ) in order to protect its legal rights and investments in Turkmenistan. As at December 31, 2022 the case is pending. Antimonopoly proceedings – In August 2018, the Federal Antimonopoly Service of Russia (“ FAS Russia ” ) charged MTS and other federal operators with violation of antimonopoly laws in respect to establishing discriminatory terms and conditions for bulk SMS pricing for the banks with state-owned equity interest as compared to the terms and conditions for other banks and later – with establishing unreasonably high bulk SMS prices. In May 2019, FAS Russia considered that MTS had breached the provisions of antimonopoly laws in respect to establishing discriminatory terms and conditions for bulk SMS pricing and charging unreasonably high bulk SMS prices, prescribing MTS to cease its violations. MTS contested the decision and the prescription of FAS Russia, however courts at different levels upheld the position of FAS Russia. In August 2021, the Group paid the fine imposed by FAS Russia in full amount of RUB 189 million. SISTEMA PJSFC AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (amounts in millions of Russian Rubles, unless otherwise stated) 99 In 2021, certain financial institutions in Russia initiated litigations against the Group, claiming reimbursement for losses incurred in connection with violation of antimonopoly laws in respect to establishing unreasonably high bulk SMS prices. The arbitration courts at three levels have dismissed all the claims in full. It ’ s currently impossible to predict the possibility or outcome of new litigations on violation of antimonopoly laws in respect to establishing unreasonably high bulk SMS prices. Management of the Group believes that as at 31 December 2022, it has adequately provided for claims related to antimonopoly proceedings. Compliance monitorship – In March 2019, the Group reached a resolution with the United States Securities and Exchange Commission ( “ SEC ” ) and the United States Department of Justice ( “ DOJ ” ) relating to the previously disclosed investigation concerning the Group’s former subsidiary in Uzbekistan, consented to the entry of an administrative cease-and-desist order (the “ Order ” ) by the SEC and entered a deferred prosecution agreement ( “ DPA ” ). Under the DPA and the Order in September 2019 the Group appointed an independent compliance monitor for, inter alia, review, testing and perfecting MTS’ anti-corruption compliance code, policies, and procedures. As at 31 December 2022 the Group has not received notice from the SEC, the DOJ or the monitor of any breach of the terms of the DPA or the Order. In 2021, given a variety of factors, including the COVID-19 pandemic, the Group has agreed to a one-year extension of the DPA and the monitorship with the DOJ and the SEC to (i) provide the Group with adequate time to implement necessary enhancements to certain critical components of the Group’s anti-corruption compliance and ethics program and (ii) allow the monitor sufficient time to be able to complete its review of the remedial efforts, including the Group’s implementation of the monitor’s recommendations and an assessment of the sustainability of the Group’s remedial actions. The term of the monitorship will continue until September 2023. In connection with compliance monitorship, certain transactions were identified relating to the Group’s subsidiary in Armenia, and such transactions were disclosed to the DOJ and SEC. The DOJ and SEC have requested information regarding the transactions and the Group has initiated an investigation into the matter. It’s currently impossible to predict the timing or outcome of the investigation. In December 2020, the Group received a request for information from the DOJ concerning certain historical transactions with a supplier of telecommunication and information technology. Currently, the Group is cooperating to provide information to the DOJ and the SEC responsive to the request. Class action complaint – In March 2019, a proposed class action complaint on behalf of Shayan Salim and all other persons similarly situated was filed in the United States District Court for the Eastern District of New York against MTS PJSC and certain of its managers. In March 2021, US District Judge of Eastern District Court of New York granted MTS’s motion to dismiss with prejudice and dismissed the complaint in full. The plaintiff filed an appeal of the dismissal by the Eastern District Court of New York. On March 31, 2022, United States Court of Appeals for the Second Circuit affirmed the dismissal by the Eastern District Court of New York and concluded the plaintiff’s claims are without merit. License fee and spectrum charges for 2002-2011 in India – In December 2019, SSTL received the Supreme Court of India judgment regarding license fee and spectrum charges for 2002-2011 in accordance with the definition and interpretation of Annual Gross Revenue (AGR) approved by the Supreme Court of India. The company calculated immaterial amount to be paid based on the aforementioned definition of AGR and considering the scheme of demerger with RCOM (which is currently undergoing bankruptcy procedures) of 2017. This amount was paid in February 2020. The Group does not expect any significant effect of this matter on the consolidated financial statements of the Group. SISTEMA PJSFC AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (amounts in millions of Russian Rubles, unless otherwise stated) 100 38. SUBSEQUENT EVENTS Melon Fashion Group – In October 2022, Sistema announced the signing of binding agreements on the acquisition of 47.7% of the shares of Melon Fashion Group JSC, Russia ’ s leading manufacturer and retailer of fashion clothing, from Swedish companies Eastnine and East Capital Holding AB and a group of private investors for RUB 15.8 billion. In March 2023, Eastnine and Sistema terminated the agreement on the sale of a block of shares by mutual consent. Purchase of stake in Buzzoola – In February 2023, the Group purchased 67% stake in Buzzoola Internet Technologies LLC (“ Buzzoola ” ), provider of digital advertising services. Total consideration contains cash payment of RUB 371 million and contingent consideration. The purchase of 67% stake was accounted as investment in joint venture. The Group is in the process of the fair value measurement of the stake. Acquisition of the portfolio of hotel assets of Wenaas Hotel Russia – In March 2023, the Group completed acquisition from the Norwegian company Wenaas Hotel Russia AS controlling stake of a number of Russian companies that own of ten hotels located in four cities of Russia. Total consideration contains cash payment of RUB 16,056 million which includes voluntary contribution to budget. The purchase of controlling stake was accounted as business combination. The Group is in the process of the assets and liabilities’ fair value measurement of the acquired business. Disposal of Arka Merchants Limited and its subsidiaries – On 22 February 2023, Segezha Group entered into agreement to sell 100% stake in share capital of Arka Merchants Limited and its subsidiaries (7 Segezha Packaging plants located in Europe and Turkey). Revenue and net profit for the year ended 31 December 2022 for Arka Merchants Limited and its subsidiaries included in “ Segezha Group ” segment results are RUB 13,747 million and RUB 384 million, respectively. Concession agreement for the project to create a medical hub “ Medsi ” in Vyksa – In February 2023, Vyksa Group LLC (segment “ Medsi ” ) and the Government of the Nizhny Novgorod Region concluded a concession agreement for the creation and construction of a medical hub in Vyksa with overall cost of RUB 3.9 billion, including VAT (in prices as at 1 January 2022). Concession agreement for the construction of a facility in Perm with the participation of the company in Corporate segment – in March 2023, the Government of the Perm Region and a subsidiary of Sistema System Concessions LLC concluded a concession agreement on the construction of a student campus in Perm, a capital grant amounts to RUB 19,6 billion. MTS bond issue placement – On 23 March 2023, MTS PJSC placed a two-year issue of exchange-traded bonds of the 001P-24 series with a nominal volume of RUB 20 billion at a coupon rate of 9.05% p.a. Segezha Group bond issue settlement and placement – On 26 January 2023, Segezha Group settled corporate bonds with nominal value of RUB 10,000 million. On 3 February 2023, Segezha Group raised funds by placing exchange-traded bonds of the 003P-02R series with a nominal value of RUB 6 billion for a period up to the offer of 2.25 years and a coupon rate of 10.6% p.a. SISTEMA PJSFC AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (amounts in millions of Russian Rubles, unless otherwise stated) 101 Etalon bond issue placement – On 22 February 2023, Etalon-Finance JSC (segment “Etalon”) placed an issue of exchange-traded bonds of the 002P-01 series with a nominal volume of RUB 8 billion at a coupon rate of 13.7% p.a. with an offer in 3 years. Medsi bond issue placement – On March 16, 2023, Medsi JSC placed two debut issues of exchange- traded bonds of series 001P-01 and 001P-02 in the amount of RUB 3 billion each and for a period of 2 and 3 years, respectively, until the offer. According to the results of the formation of the application book, quarterly coupon rates were: 9.85% p.a. for the 001P-01 series and 10.35% p.a. for the 001P-02 series.
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