Risk Management

Risk Management System

Risk management is carried out in MTS Group within the accepted conceptual risk management frameworks (document “Company Risk Management. Integrated Model” of the Committee of Sponsoring Organizations of the Treadway Commission (COSO)). The integrated risk management process is functioning efficiently in accordance with the needs of the Group and international standards. Risk management policy aims to minimize unexpected losses from risks and to maximize capitalisation, taking into account the relation between risk and return of investments acceptable to the shareholders and the management of MTS Group.

The risk management process passed all stages of implementation, automation and integration into the company business processes (processes of strategic and investment planning, as well as into the cross-functional projects and the preparation of external reporting), that now makes it possible to identify and consider the risks when making key decisions for the guaranteed achievement of goals and strengthening of business leadership.

Risk Management Department of the Corporate Centre (RMD CC) assesses the most significant risks on the basis of long-term financial model and regularly conducts simulations for obtaining key financial indicators considering the risk and probability distributions of these indicators. RMD CC applies econometric techniques for the analysis of individual risks.

A report on the status of the MTS Group risks is reviewed quarterly by the Risk Committee, which discusses the key company risks and makes collective decision on the elaboration of measures for their mitigation.

Notification of the MTS Group management is carried out taking into account the whole risk spectrum to ensure the completeness, quality and comparability of the information provided for each level of decision-making.

Organisational Risk Management Support

Risk management activity is distributed among the functional units of the company:

  • RMD CC is responsible for developing a risk assessment methodology, regular collection of information and reporting the results of this assessment to the Risk Committee and the company executives. RMD CC also carries out operational control of the process and provides cross-functional interaction between units within the integrated risk management in the company. Cross-functional interaction with the risk owners in subsidiaries is provided by risk coordinators in such subsidiaries.
  • The risk owners are the heads of functional units, whose achievement of goals is affected by the risks. The owners are responsible for the analysis, evaluation, implementation of risk management measures and reporting on the activity within the process of integrated risk management.
  • The Risk Committee makes collective decisions in the field of integrated risk management.
  • The efficiency of the risk management process is estimated by the Unit for Internal Control and Audit with the corresponding information presented for consideration, in particular, to the Audit Committee.
  • The Audit Committee monitors the risk management efficiency, as well as the assessment of procedures used by MTS Group to identify the principal risks and evaluation of appropriate control procedures (including the procedures for loss control and risk insurance) in order to determine their adequacy and efficiency.
  • The Board of Directors operates directly or through its committees within its competence and resolves the issues of assessing the political, financial and other risks affecting the Company’s operation. MTS Board of Directors delegates monitoring of risk management efficiency to the MTS Audit Committee, as well as reviews the Audit Committee reports.

2015 Key Activities

The Committees for Risks of CC and its subsidiaries were conducted.

The Policy for Managing Antitrust Risks confirmed the participation of the Risk Management Department (hereinafter – RMD) in the assessment of risks associated with the antitrust legislation.

RMD assessed the principal risks in the framework of the MTS Group strategic session.

RMD assessed the risks of investment projects aimed at:

  • development of fixed-line business;
  • transport subsystem management;
  • development of IT infrastructure;
  • construction and optimisation of a radio subsystem;
  • cost optimisation;
  • development and launch of new services.

RMD conducted trainings on risk management for MTS employees.

Plans for 2016

In 2016, it is planned to update information on risks for the external reporting regularly and hold Risk Committees on a routine basis. It is also planned to further integrate into the decision-making processes, including to provide analytical conclusions for individual projects within functional units.

Risk Factors

Risk Description Risk Mitigation Measures
Country and macroeconomic risks
Macroeconomic and socio-political instability, possible downturns and slowdown of economic growth in the countries where we operate may lead to a decrease in demand for the provided services, and have a negative impact on the financial condition of our corporate customers and partners, including financial institutions, which can lead to the decrease in our revenues and performance indicators and adversely affect the security of assets.

We are now monitoring the macroeconomic situation in the markets where the Group operates.
In order to strengthen our leading position, we are focused on the expansion of coverage and capacity of the existing network, as well as on ensuring the satisfaction of customers with the quality of communication services.

We can be influenced by country and political risks, as well as the risks associated with the legal status and the ability to provide uninterrupted services in the countries where we operate, which may affect our financial condition, the security of assets and operating results. We are now monitoring the political situation in the markets where the Group operates, which allows responding quickly to the changing conditions in the markets functioning.
Financial risks

The considerable part of our expenses, costs and financial obligations, including capital expenses and loans, are denominated in USD and/or EUR or linked to USD and/or EUR exchange rate, while the large portion of our income is denominated in local currencies of the countries where we operate. The situation in our markets, including stability of the banking system, inflation, change in exchange rates of local currencies against USD and/or EUR, a possibility for free conversion of currencies and making currency payments impacts our operating performance and business results.
Rate of the Company’s development and its financial standing depend on debt financing. Crisis of financial markets, external limitations and sanction may restrict the ability of the Company to raise debt financing.

A number of measures were taken aimed at the portfolio structuring in order to reduce dependence on exchange rate fluctuations; in particular, there is a system for currency risk hedging in place.
In order to develop our business, the company attracts new funding sources, in particular, we signed a loan agreement with China Development Bank in 2015 to raise funds in Chinese Yuan and US dollars.

The contracts related to our bonds and bonds of our controlling shareholder, and also some loan agreements include restrictive provisions that limit our opportunities to raise loans and engage in various activities. Failure to comply with such contractual provisions could have resulted in default and, as a result, in a request to immediately repay the debt, which might have negative effects on our business. We are monitoring the implementation of the provisions of contracts and agreements for granting loans in order to comply with the financial covenants contained in the loan documentation.
The system of taxation in the countries where we operate is undergoing constant changes; legislation in this area tends to have ambiguous interpretation. For example, poorly drafted Russian transfer pricing rules may increase the risk of price adjustment by tax authorities and lead to additional tax burden within transfer pricing control. This may complicate tax planning and related business processes, and may also have adverse material impact on our business, financial standing and operating results. We meet the requirements of the tax legislation in the countries where the Group operates. We respond to any changes promptly and follow the current trends in law-making, as well as tax laws of Russia and foreign jurisdictions, which allows making timely integrated decisions in the field of tax planning and customs regulation. We use the experience of qualified consultants quite often.
Regulatory and legal risks

Our business in the countries where we operate is regulated by governments, in particular, through licensing and laws. Legislation in the field of communication services is constantly changing.
For example, the Ministry of Communications of the Russian Federation is currently considering the possibility of changing the concept and regulation of inter-operator interaction. In addition, an issue on changes in the existing approaches and rules in the field of regulating prices for the services of interconnection and traffic transit is being considered.
In June 2015, the media reported that the Ministry of Communications prepared a draft order, according to which telecommunication operators may be required to collect and store information on all communication management actions committed by their personnel for three years and provide it to the FSB upon request. Moreover, the intelligence agencies can get access to data on foreign contractors of the operators.
On April 11, 2016, the draft law «On introduction of amendments to certain legislative instruments of the Russian Federation to the extent of provision for additional measures to combat terrorism and ensure public security” was submitted for consideration to the dedicated committee of the State Duma in accordance wherewith telecommunication operators may become obliged to store information on facts of receipt, transmission, delivery and/or processing of voice information and text messages, inclusive of their contents as well as images, sounds and other messages of telecommunication services users within the Russian Federation territory for three years and to provide the said information to the empowered state authorities carrying out operational investigative activities or ensuring security of the Russian Federation as may require it for completion of the objectives entrusted to such authorities in the cases established by federal laws.
Compliance with the requirements stipulated by laws and orders (if adopted) could result in additional costs incurred by the operator to implement the legislation standards.
State authorities of the countries where we operate have high degree of discretion in terms of issuing, renewal, suspension and withdrawal of licenses, identification of criteria to classify companies in certain territories as monopolies, companies with dominant and / or a significant position, etc.

We conduct regular monitoring of the legislation in order to meet the requirements set.
As market representatives, we participate together with the regulatory authorities in the working groups on optimisation of the regulatory framework in the communication industry.
Regulatory risks are given special attention within the framework of strategic planning.

Being a company whose stock is traded in the U.S. stock market, we are subject not only to Russian, but also to American anti-corruption legislation (US Foreign Corrupt Practices Act), and potentially to anti-corruption law of the UK (UK Bribery Act). If an inconsistency of our actions with these requirements is revealed, this may result in criminal and / or civil law sanctions against us.
In March 2014, MTS PJSC received a request for information from the US Securities and Exchange Commission and the US Department of Justice regarding the investigation of the former subsidiary in Uzbekistan. MTS PJSC is cooperating with the above-mentioned organisations: it provided the information upon request and continues to provide answers on demand. Since the investigation has not been completed, there is no way to predict its outcome, including the possible imposition of fines and penalties which could be significant.

There are special rules and procedures necessary for the prevention of corrupt practices both on the part of employees and contractors applicable in the company.
Technology risks
We use radio frequencies distributed by the governments of the countries where we operate. Our network capacity and possibility of its expansion, which, among other things, is important to maintain our market share in terms of subscribers and profits, depends on the possibility of timely prolong the right for currently used radio frequencies and receive new ones. We are monitoring the deadlines for the licenses for the provision of telecommunication services and take all necessary measures for their timely extension, ensure compliance with license conditions and other regulatory requirements.
The ability to continuously provide communications services is one of the basic conditions of licenses and subscription contracts. Technology breakdowns during servicing of our network as a result of system failure, accident or violation of network security may adversely affect the ability to provide services to the subscribers and our reputation. In order to render the communication services, the use of the reserve telecommunication equipment, network management systems, operating and maintenance systems is provided. Information security is provided by a complex system of engineering, technical and other information security measures.
Competitive environment
Our business, performance indicators and financial position depend on the competitive environment in the countries where we operate, demand for our services and efficiency of operations. The telecommunications market is characterised by rapid technological changes and differs by continuous emergence of new competitive products and services. Increased competition associated with the emergence of new market players, as well as the increased use of IP-telephony and other services provided via the Internet, may adversely affect the ability to support subscriber base growth and lead to a reduction in operating income margin, a reduction in market share and use of different pricing, servicing or marketing policies, and have a material adverse effect on the business, financial condition and operation performance.

We invest in the development/update of the communication networks, as well as in the related business areas.
Our strategy involves the creation of synergies with the Group companies as part of the development of the technological base for the expansion of the range of services for all market segments and strengthening the leadership in the telecommunication industry.

Operation risks
We invest in expanding the portfolio of value added services and also in building communication systems (including 4G), developing wireless and fixed-line communication services, television and other new competitive services. Our competitive status, financial and performance indicators, among other things, depend on success in implementation of these initiatives. We provide a balanced investment policy in order to expand the network infrastructure and the range of services rendered.
Rate of growth of our subscriber base, market share and revenue depend, inter alia, on the ability to expand our retail chain, maintain relationships with regional distributors and on the independent dealers’ market structure. We work on the expansion and improvement of the home trade network, on maintenance and further development of the marketing network through national, regional and local dealers.

Details on these and other risks see in the section “Item 3 – Key Information – D. Risk Factors” of the annual report of MTS PJSC according to the form 20-F, and in quarterly reports of MTS PJSC.