Rostelecom Reports 2003 Growth

MOSCOW -- Rostelecom (NYSE: ROS; RTS: RTKM, RTKMp), Russia’s national long-distance telecommunications operator, today announced audited results for the full year ended December 31, 2003 in accordance with International Financial Reporting Standards (IAS):

Operating profit surged 36.8% year-on-year to USD 109.2 million; Rostelecom’s CEO Dmitry Yerokhin commented: “2003 marked an important shift in our priorities from restructuring to growth. Rostelecom achieved its key objective – a strong increase in traffic and revenues – thanks to the growth of the Russian telecoms market and intensive efforts to increase the Company’s competitiveness.

“Rostelecom maintained its leadership in the regions, stabilized its position in Moscow, and increased its share of incoming international traffic. The Company also enhanced operational efficiency, reduced debt and disposed of underperforming and non-core assets to increase its focus.“In 2004, our goals are to further strengthen the Company’s position in the Russian telecommunications market, increasing revenues and efficiency levels while playing an active role in industry reform.”

Consolidated revenue for the full year 2003 increased by 24.1% to USD 1,039.1 million; or 12.6% to USD 942.4 million excluding the effect of the introduction of the new settlement system. Domestic long-distance traffic rose 15.2% year-on-year, while outgoing international traffic – by 7.2% as Rostelecom strengthened its leadership in the regions and stabilized its position in the Moscow market. Competitive new tariff policies in Moscow and the benefits of the new settlement system with regional operators contributed to traffic and revenue growth. Rostelecom also substantially strengthened its competitive position in the international operators’ market, gaining market share and delivering impressive incoming traffic growth of 24.1%.

A major milestone of 2003 was the reform of the settlement system for domestic long-distance traffic. The new system represents an important step in the development of a rational, market-based telecom sector. It significantly increased the transparency and accuracy of settlements and enabled Rostelecom to capture a greater share of traffic on its network. The introduction of the new settlement produced a USD 96.7 million positive effect on 2003 revenues and USD (89.8) million effect on operating costs.

Traffic growth resulted in higher payments to operators; and increases in salaries to achieve market levels also contributed to the rise in operating costs. Despite this, full year 2003 OIBDA increased 11.9% year-on-year to USD 385.3 million.

In 2003 the Company continued to optimize its assets structure, including discontinuation of usage of underperforming and inefficient assets and equipment. These efforts explain growth in non-cash loss on sale of property, plant and equipment. This had a negative effect on operating profit this year but will have a positive impact on cash generation in future years. Rostelecom also further reduced headcount by 13% year-on-year thanks to its asset optimization program and business-processes improvements. At December 31, 2003 the Company’s headcount amounted to 26,742.

In 2003 Rostelecom continued to improve balance sheet structure including optimization of corporate debt and disposal of non-core assets. In the first half of 2003 Rostelecom restructured its overdue Yen-denominated debt (principal and accrued interest) totaling an equivalent of approximately USD 100 million to the Ministry of Finance. As a result, penalties and fines accrued on the debt were written off, producing a positive impact of USD 24 million in non-operating income.

In the second half of 2003 Rostelecom sold its stake in RTC-Leasing, optimizing the Company’s business portfolio, while selling a non-core asset on favorable terms and reducing debt and credit risk. More details on consolidation of RTC-Leasing and the sale are provided below.

Consolidated net income for the full year 2003 totaled USD 40.6 million, an increase of 9.2% year-on-year.

Rostelecom