Related party transaction

(a) The Government and OAO Svyazinvest as a shareholder

As indicated in Note 1, the Government of the Russian Federation controls the Company by indirect holding of 53.2% of the Company’s ordinary shares through OJSC “Svyazinvest”, “Vnesheconombank” and Federal Agency of State properties management. OJSC “Svyazinvest”, the major shareholder of the Company with 43.37% share, is fully owned by the Government. It is a matter of the Government policy to retain a controlling stake in sectors of the economy, such as telecommunications, that it views as strategic.

(b) Interest of the Government in the telecommunications sector in the Russian Federation and the protection of that interest

Effective telecommunications and data transmission are of great importance to Russia for various reasons, including economic, social, strategic and national security considerations. The Government has exercised and may be expected to exercise significant influence over the operations of the telecommunications sector and consequently, the Group. The Government, acting through the Federal Tariff Service and the Federal Telecommunications Agency, has the general authority to regulate certain tariffs. In addition to the regulation of tariffs, the telecommunication legislation requires the Group and other operators to make certain revenue-based payments to the Universal service fund, which is controlled by the Federal Telecommunications Agency. Moreover, the Ministry of Telecom and Mass Communications of the Russian Federation has control over the licensing of providers of telecommunications services.

(c)  Subsidiaries

The companies comprising the Group perform transactions with subsidiaries as part of their day-to-day operations. Financial results and account balances on transactions with subsidiaries are excluded from the Group’s financial statements. The companies enter transactions with subsidiaries on market terms. Tariffs for subsidiaries are at the same level with tariffs for other parties and mostly are fixed by a regulatory body.

(d) Associates

The Group is also involved in various telecommunication services with entities in which it has investments, including associates over which it exerts significant influence. A summary of these transactions is as follows:

  2012 2011 2010
Revenue 207 128 115
Purchase of telecommunication and other services (595) (453) (197)

The amounts of receivables and payables due from these entities were as follows:

  2012 2011 2010
Accounts receivable 75 14 15
Allowance for doubtful receivables (9) (1) (9)
Accounts payable and accrued expenses (23) (27) (20)

(e)  Transactions with the companies of Svyazinvest Group

The amounts of revenue and expenses relating to the transactions with Svyazinvest Group were as follows:

  2012 2011 2010
Revenue 271 272 546
Purchase of telecommunication services (277) (304) (894)
Purchase of other services (48) (128) (408)

The amounts of receivables and payables due from and to Svyazinvest Group were as follows:

  2012 2011 2010
Accounts receivable 105 82 56
Allowance for doubtful receivables (19) (6) -
Accounts payable and accrued expenses  (206) (131) (250)
Dividends payable - - (3,678)

The Group also receives services related to the construction of the network from certain companies of the Svyazinvest Group which are included in additions of property, plant and equipment in amount of 396 (2011: 641, 2010: 716).

The Group held promissory notes issued by OJSC Tsentralniy Telegraf which is a part of Svyazinvest Group. Interest income accrued for the year ended 31 December 2012 and 2011 is nil (2010: 65).

In December 2012 the Group acquired 140,315,416 additional ordinary shares of OJSC Svyazinvest for a total cash consideration of 1,720.

(f) Non-state pension fund “Telecom-Soyuz”

The Group has centralized pension agreements with a non-state pension fund “Telecom-Soyuz” (refer to Note 19). In addition to the state pension, the Company provides the employees with a non-state pension and other employee benefits through defined benefit and defined contribution plans.

The total amount of contributions to non-state pension fund paid by the Group in 2012 amounted to 1,235 (2011: 1,661, 2010: 1,937). The fund retains 3% of every pension contribution to cover its administrative costs.

(g) Transactions with other government-related entities

In January 2009, OJSC Rostelecom in partnership with mobile operator OAO Megafon won a tender for sponsorship of the ХХII Winter Olympic Games and the XI Winter Paralympic Games 2014 in Sochi in a category “Telecommunications”. According to the agreement with the Organisation committee of ХХII Winter Olympic Games and the XI Winter Paralympic Games 2014 in Sochi the sponsorship contribution amounts to USD 260 million and should be contributed by each sponsor in the amount of USD 130 million. Half of this amount shall be paid in cash and the other half shall be contributed in free services. In return, each partner will obtain exclusive rights to use the Olympic logo in its advertising and other activity. There is a joint responsibility of the Group and Megafon in respect of non-cash contributions. The total charge of sponsorship contribution to profit and loss for the year ended 31 December 2012 amounted to 609 (2011: 463, 2010: 469). As at 31 December 2012, the total commitment due to be paid in cash by 2014 is USD 20,1 million. 

The Group considers this transaction as a transaction with a related party because the Group treats the Organisation committee as a government-related entity. The reason for this is that the federal government was one of the founders of the Organisation committee and government executives are on the Oversight Board of this Organisation.

In December 2009, OJSC Rostelecom entered into a state contract with the Ministry of Telecom and Mass Communications of the Russian Federation to realise project Electronic government. The project involves equipment and software installation, development of web site for on-line access to information about government services, possibility to apply documents to government bodies via web-site, having support via call center and other related services. In 2010 the Company negotiated the new state contracts on maintenance of the Electronic government systems and on development of some new e-government applications. Total revenue under the contracts are disclosed in the Note 21 on the line Cloud computing services.

The Group received loans from government-related banks OJSC Sberbank, OJSC Bank VTB, OJSC Sviaz-bank, OJSC Gazprombank and others. The outstanding balances from these banks amounted to 175,012 as at 31 December 2012 (2011: 125,270, 2010: 82,604). During year ended 31 December 2012 the Group obtained loans from these banks in amount of 430,787 (2011: 217,534, 2010: 101,574), made repayments in amount of 393,856 (2011: 182,884, 2010: 62,215). Interest expense accrued on those loans during year ended 31 December 2012 amounted to 12,811 (2011: 7,928, 2010: 2,903).

The Group has collectively but not individually significant transactions with other government-related entities including but not limited to providing telecommunication services, consuming services having both production and miscellaneous nature, depositing and borrowing money. All these transactions are carried out in the course of normal day-to-day business operations on the terms comparable to those with other entities which are not government-related. Management assesses these transactions as not particular material except for placing deposits and purchase and sales of investments in promissory notes of government-related banks.

Proceeds from sales of government-related banks promissory notes for the year ended 31 December 2012 amounted to 1,044 (2011: 1,766, 2010: 9,841), purchases of the same kind of investments comprised 1,000, 712 and nil for 2012, 2011 and 2010 respectively. Related income recognized in profit and loss in respect of government-related banks promissory notes amounted to 44 for the year ended 31 December 2012 (2011: 66, 2010: 41).

The amount of funds placed on deposits with government-related banks for the year ended 31 December 2012 is 873 (2011: 2,676, 2010: nil) with related income recognised in profit and loss of 47 (2011:28, 2010: nil) and amounts repaid back to the Company’s account of 2,187 (2011: 953, 2010: nil).

(h) Remuneration of key management personnel

The key management personnel for the purpose of these consolidated financial statements comprises Management Board’s members, the Board of Directors’ members and Vice-Presidents.

Remuneration to the key management personnel for the year ended 31 December 2012 amounted to 522. Remuneration includes salaries, bonuses, payments for participation in the work of management bodies and other short-term benefits.

The remuneration amounts are stated exclusive of social taxes.

Also in June 2011 the Company introduced a long-term motivation programme for executives and senior employees of the Company. The amount of employee benefits related to the programme and attributed to the Management Board’s members, the Board of Directors’ members and Vice-Presidents for the year ended 31 December 2012 is nil (2011: 467).

The key management personnel in 2009-2010 comprises also members of the Management Boards and the Boards of Directors of IRC companies.

Short-term benefits accrued to the key management personnel for the year ended 31 December 2011 amounted to 432 (2010: 1,756). In 2010, the remuneration of the key management personnel in terms of share option granted amounted to 1,850.

In 2012 the Group made a contribution of 1,967 to the non-state pension fund (2011: nil, 2010: 8) for its key management personnel. The plans provide for payment of retirement benefits starting date employee complies with terms of acting non-state pension program.