Annual Report 2015



Principal Risks and Uncertainties


Sanctions Description and potential impact
Several entities and individuals in Russia are already subject to sanctions over the conflict in Ukraine, and there is a risk of further and broader sanctions.
Risk mitigation
Neither the Company nor the telecoms industry in general are currently subject to direct sanctions, and we do not anticipate such sanctions being imposed.

The fact that all our operations are based in Russia and all our revenues come from this market also help minimise the impact of any such sanctions on our business and our financial results.
Effect upon relationships with counterparties (vendors and suppliers) Description and potential impact
Further sanctions might be imposed on supplies of equipment, software or services from the EU and the United States.
Risk mitigation
To address the possible impacts of sanctions we have done a thorough analysis of all counterparties that might be at risk, evaluated the possible impact, explored possible alternatives and developed a list of potential substitutes and other measures to mitigate the possible impact of such sanctions.
Risk of credit rating downgrade Description and potential impact
Some international rating agencies may further downgrade Russia’s sovereign credit rating.

MegaFon’s credit ratings may be constrained by either Russia’s sovereign credit ratings, or by the agencies’ country ceilings for Russian corporates, as the Company’s business is concentrated mostly in Russia.

Thus, the latest downgrade in Russia’s sovereign credit rating caused a reduction in MegaFon’s corporate rating and further sovereign credit downgrades may lead to further cuts in the Company’s rating, which could cause an increase in our borrowing costs.
Risk mitigation
Despite the recent downgrade, MegaFon’s ratings remain among the highest in the Russian corporate sector and this resilience, along with our ability to deliver strong financial performance, will continue to ensure that we have access to funding.

Furthermore, our existing credit facilities do not contain any terms that are tied to changes in our credit ratings.
Bank accounts of systemically important companies Description and potential impact
Pursuant to Federal Law No. 213-FZ On the Opening of Bank Accounts and Letters of Credit certain strategic companies are required to open and close accounts and deposit accounts at or purchase securities from only  the Russian banks specified by the Central Bank of Russia and/or the Russian Government. Furthermore, when engaging in such transactions with foreign banks, such companies are required to notify competent authorities accordingly. Additionally, such strategically important companies are required to maintain their securities registers only with registrars that meet certain requirements specified in the Law.
If further sanctions are imposed, there is a possibility that Law No. 213-FZ, currently applies to entities in the national defence-industrial complex, may be extended to cover systemically important companies in other sectors as well, including our Company, which has already been identified as a company strategically important to the economy under Federal Law 57-FZ.

Risk mitigation
We are closely monitoring the situation, and are prepared to take appropriate measures should this risk materialise.
Liquidity risk Description and potential impact
Deterioration of Russian corporates’ access to Western capital markets and higher key rate may limit our access to capital and increase our borrowing costs.

Further sanctions could lead to restrictions on access to clearing systems or prohibition on certain transactions, which would affect our international payments.
Risk mitigation
To date, a large portion of our deposits has been denominated in foreign currencies, which protects our liquidity position against the revaluation risk arising from adverse changes in FX rates.

MegaFon has access to adequate funding through the credit facilities, which it has in place. This reduces risks of refinancing our existing debt required in the short and medium term.


Risk of a macroeconomic slowdown Description and potential impact
Lowering oil prices, a weaker Rouble and rising inflation may negatively impact the Russian economy, leading to reduced consumer purchasing power and a decrease in household consumption, which could potentially result in lower revenues from telecoms services. A macroeconomic decline might also lead to the withdrawal of investment in certain projects, which would slow down our network roll-out.

Risk mitigation
Our internal analysis suggests that the wireless market is more resilient in an economic slowdown as consumers tend to be dependent on mobile and internet services, and as a result do not consider spending less on these services. 
We have entered into long-term contracts with Huawei, Ericsson and Nokia Siemens Networks to assure the continued construction and modernisation of our network.

We have signed financing agreements with China Development Bank Corporation and other banks (with guarantees provided by Finnvera export credit agency) for the purchase of equipment and services from Huawei and Nokia Siemens Networks, respectively, for network development, allowing us to cater for our medium-term requirements.


Risk of increased competition Description and potential impact
The mobile telecom business, which provides the bulk of our revenue, is one of the most developed areas of the Russian telecommunications sector. The mobile market in Russia is characterised by high penetration (176.3% in 2015)1 and keen competition, with all operators trying to increase existing customer loyalty and attract new subscribers through service excellence and attractive offers.

MegaFon’s key direct competitors include MTS, VimpelCom, and Tele2.

In 2014, Rostelecom completed the final stage of a deal to create a new national mobile operator – Tele2, which is a joint venture with Tele2 Russia. As part of this deal, Rostelecom transferred all its mobile assets to Tele2. In 2015, Tele2 started providing 3G/4G data services in the Moscow region.

MTS and VimpelCom have decided to jointly develop their 4G/LTE networks.

Additionally, MegaFon may face competition from various MVNO operators. In 2015, Sberbank started negotiating on MVNO terms with various mobile operators including Tele2 and VimpelCom. Should the launch of Sberbank’s MVNO project be successful, it may lead to more intense competition and subsequently additional pricing pressure in the market.
Risk mitigation
Evolving business models in our market may lead to changes in market structure and dynamics. Failure to anticipate and respond to these developments, and to make consequent adjustments to our model may affect our customer relationships, service offerings and market position and result in a negative impact on our operating results.

Risk mitigation
MegaFon is the second largest Russian mobile operator by subscriber base and revenue. We have licences to provide GSM, 3G and 4G services throughout the country.  At the end of 2015, our 3G services were available in 83 Russian regions, while our LTE services were available in 77 regions, and our LTE-Advanced high-speed services in 9 cities. We also have an extensive retail network, comprising 2,096 owned-and-operated stores and 1,980 franchised stores, allowing us to control our distribution channels and deliver a wide range of high-quality services to customers.

We believe that our extensive backbone networks, unrivalled spectrum advantage, leadership in 4G/LTE mobile data services, extensive distribution network, diversified portfolio of products and services, and smart approach to CAPEX allocation and cost optimisation should enable us to withstand any competitive pressure from these developments. 

In early 2016, MegaFon signed an agreement with Vimpelcom on the joint development and operation of LTE standard communication networks, according to which new base stations with 4G support will be deployed in 10 regions. Construction and operation costs will be divided between the two companies. The launch of the network is planned for after the second quarter of 2016.
Risk of not keeping pace with technological advancements Description and potential impact
The Russian telecommunications industry is experiencing significant changes due to the rapid development of new technologies and standards (LTE, LTE-A, etc.). As a result, many operators are at risk of their services becoming outdated and uncompetitive.
Risk mitigation
We have kept pace, and we intend to continue to keep pace with technological progress and new industry standards by adopting the latest technologies, and by developing and introducing more effective and innovative products and services.

Due to our unrivalled spectrum advantage we can offer telecoms services across the entire range of standards currently available in the market (2G/3G/LTE/LTE-Advanced).
Customer churn risk Description and potential impact
Like other Russian operators, we have a significant churn rate. Given the competitive mobile environment in Russia and the recent introduction of MNP (mobile number portability), it is vital that we not only acquire new customers, but also maintain our focus on retaining existing customers and strengthening their loyalty to MegaFon.
Risk mitigation
In 2015, as part of our ongoing efforts to improve our customers’ loyalty and attract new customers, we continued to improve the quality of connections  and customer service across our retail stores, call centres, and online platforms; to rollout our 4G/LTE networks and modernise our 3G network and to commercially launch LTE-Advanced networks in new regions.

In 2015, we offered our customers revised bundled tariffs and tariff options at affordable prices, started introducing new services, and improved customer experience (e.g. by launching a service to shorten the blocking period in case of late payments).

In addition, in 2015, we launched a new advertising campaign to more clearly differentiate our offering from competition.
Risk of new business acquisitions or strategic alliances having an adverse impact on our business Description and potential impact
Our aim is to increase the Company’s market value by  effectively integrating any new acquisitions or assets to achieve maximum synergies, including in costs and revenue, and ensure further growth for the acquired assets. Any asset acquisition is always preceded by due diligence of the asset, evaluation of the viability of acquiring the asset, verification of ownership and other legal due diligence, and a thorough financial analysis of the proposed transaction.  We believe that we have a good track record on all these counts in relation to transactions in the past and our management consists of experienced professionals who have necessary expertise and qualifications for effective decision making. MegaFon may continue to expand its business through business acquisitions and strategic alliances. Should we be unsuccessful in integrating or managing any acquired company or strategic alliance, there is a very low probability that management’s attention may be diverted away from other business concerns. In addition, any unsuccessful acquisition could negatively affect our financial position and credit ratings or dilute the value of our shares subject to the asset acquisition deal structure, possible deferred payments, FX exposure in the transaction price, etc.
Risk mitigation
In 2015, MegaFon completed three major acquisitions:
  • acquisition of 100% of the voting shares in JSC SMARTS-Samara, CJSC Astrakhan GSM, CJS Yaroslavl GSM, and CJSC SMARTS-Cheboksary (the “Companies”). These acquisitions will provide MegaFon with a number of strategic benefits, including consolidation and improvement of its position in 900/1,800 MHz spectrum in the regions through more efficient network development. It will also allow the Company to consolidate its leadership in the Samara market, as well as protect its telecoms market shares in other cities of the Volga and North-West regions;
  • acquisition of 100% interest in GARS Telecom. The acquisition will enable MegaFon to grow its share of the B2B market and enhance its fixed-line presence in business centres in Moscow and St Petersburg;
  • acquisition of 49.999% of the share capital of Glanbury Investments Ltd, the owner of Closed Joint Stock Company Garden Ring (Sadovoe Koltso), which owns and operates a class A office building in Oruzheyny Pereulok in the centre of Moscow. The building will be used as MegaFon’s new headquarters, allowing MegaFon to move to a single location up to 4,000 employees who currently occupy six separate properties in various parts of Moscow. A ten-year lease agreement was signed simultaneously with the transaction completion. This transaction will enable MegaFon to cut its rental costs (saving up to US$ 98 million over the next ten years) and mitigate FX risks as the lease rates were fixed in roubles.
Telecommunications fraud risks Description and potential impact
MegaFon may incur losses as a result of wilful misconduct of unscrupulous counterparties or subscribers. We also risk losing subscribers who become victims of fraud, which also causes reputational damage.

Risk mitigation
We have a separate unit within the Company responsible for the prevention of fraud and associated financial or reputational losses, and for the protection of our customers against fraud.  Its activities are carried out in accordance with applicable laws of the Russian Federation and regulatory requirements, and are aligned to MegaFon’s business targets.
To support these activities we use a number of specialist, automated anti-fraud solutions which enable near real-time detection of fraud threats to our business and elimination of such threats. Monitoring for the more critical fraud threats is carried out 24/7.

In 2015, further efforts were made to prevent fraud-related losses, by improving the existing and developing new business processes, systems and services.
Information security risks Description and potential impact
Given the fast-paced development of information technology, there is a risk of failure to ensure the appropriate levels of information security for our software, subscribers’ personal data protection tools, and equipment.

There is also a risk of intrusion into the Company’s internal networks, including IT systems, which may result in malicious applications being introduced onto the equipment of the Company’s employees, unauthorised access to customers’ personal data or confidential information, with such data being compromised, or the spread of malware (viruses).
Risk mitigation
MegaFon takes all necessary measures to ensure the appropriate levels of security for its IT systems, software, technologies and equipment, including continuous monitoring for potential threats and the use of Security Intelligence platforms across its IT and telecommunications infrastructures, as well as the use of the latest software ensuring high levels of security. MegaFon also maintains and implements a strong information security policy and provides training and testing of all employees in this field. 

To prevent security risks and minimise the likelihood of threats being realised a working group has been established in the Company to develop and implement a set of new measures to improve information security. The Company’s management has launched a high priority project for 2016 to enhance the telecommunications security strategy.


General Russia’s mobile telecommunications industry is governed by federal laws On Communications, On Personal Data, and On Information, Information Technology and Information Protection, as well as by numerous relevant regulations and standards.
Transfer pricing Description and potential impact
In 2012, significant amendments were made to transfer pricing legislation, providing for monitoring of prices used in controlled transactions to make sure they are in line with the market. The amended legislation expands the range of methods used to monitor prices to make sure they are in line with the market, extends the list of transactions treated as controlled transactions, and imposes on taxpayers the duty to prepare documentation related to controlled transactions and notify the tax authorities about the execution of such transactions.  The tax authorities may impose additional tax liabilities if prices applied under a controlled transaction are found to be not at “arm’s length”.

Since the practice of enforcement of transfer pricing legislation is still in its infancy, it is possible that the approaches used by us to justify the market level of prices under controlled transactions will be challenged by the tax authorities, which may lead to additional tax liabilities being imposed.
Risk mitigation
We have implemented a number of measures to monitor the compliance of the Company’s pricing practices with transfer pricing rules.

Specifically, as of 2012, we implemented and continue to improve the Company’s internal procedures designed to ensure compliance with transfer pricing legislation requirements, including an internal system for the identification of controlled transactions.  In addition, we have formed a consolidated group of taxpayers within the MegaFon Group, so that transactions within this consolidated group are not subject to transfer pricing control. 

We believe that the Company’s transfer pricing policy and practice comply with the requirements of transfer pricing legislation.
Controlled foreign companies Description and potential impact
In 2015, the Russian law On Controlled Foreign Companies (CFC Rules) came into force. The CFC Rules govern the taxation in Russia of the retained profits of foreign companies and non-corporate structures (including trusts) controlled by Russian residents (companies and individuals).

Russian taxpayers (controlling parties) must inform the tax authorities of the foreign companies controlled by them, while the tax authorities may impose additional tax liabilities on taxpayers failing to include the retained profit of their controlled foreign companies in their taxable base.
Risk mitigation
To ensure compliance with the CFC Rules we have developed internal procedures to identify companies that may be treated as controlled foreign companies. We have further developed a step-by-step action plan in relation to such companies and the schedule for preparation and filing of the required documents with the tax authorities. 

Specifically, in 2015, we submitted to the Russian tax authorities on time the information about the Company’s participation in foreign entities.We continue to improve our internal procedures in accordance with official directives and instructions provided by the competent authorities; we also monitor and analyse new regulatory initiatives related to CFC legislation.
Risk of revocation, suspension or non-renewal of our licences Description and potential impact
Since MegaFon’s principal activity is providing telecommunications services, revocation, suspension or non-renewal of our licences could have a significant adverse impact on our business. The Company also uses resources which are considered finite, including frequency spectrum and numbering capacity, and their unavailability for any reason could adversely affect our operations.
Risk mitigation
So far, MegaFon has not faced difficulties in obtaining or renewing licences or permits, or in gaining access to adequate spectrum or numbering capacity. To ensure this continues we maintain a constructive dialogue with regulators and ensure compliance with the terms of our licence agreements and with other regulatory requirements applicable to our business.
Risk of the technological neutrality principle having an adverse impact on our business Description and potential impact
Technological neutrality can potentially increase competition for MegaFon in the future in spite of the significant investment requirements made by the State Commission for Radio Frequencies of the Russian Federation (SCRF).

In December 2013, the SCRF approved the principle of technological neutrality for UMTS technologies in the 900 MHz frequency band and for LTE technology in the 1,800 MHz frequency band, and in 2014 for LTE technology in the 900 MHz frequency band. The stated objective of these measures is to stimulate the development of 3G and 4G technologies in Russia, as operators with 2G licenses for 900 MHz and 1,800 MHz frequencies may now use these frequencies to deploy 3G and 4G technologies.
The SCRF plans to take these efforts further, extending the technological neutrality principle to allow LTE technology to be deployed in other frequency ranges.

Risk mitigation
We regard technological neutrality not only as a risk, but also as an opportunity because it will allow us to provide better quality services to our customers as a result of making available our entire frequency range.
Risk of changes in regulation of in inter-operator relationships Description and potential impact
In 2014, the Government Communications Commission, led by Deputy Prime Minister Arkady Dvorkovich, discussed the issue of amending the existing regulation of operator cooperation with regard to requirements for traffic transfer procedures in communications networks and requirements for networking.

Government regulatory bodies continue to develop new regulations in the field of operator relationships, including tariff regulations.

The implementation of these government initiatives may result in lower rates for traffic transfer and call services, and, thus, a decrease in revenues from communications services.
Risk mitigation
The Russian Government has been considering various options of amending the existing regulation regarding inter-operator relationships between mobile operators and fixed operators to assess their potential impacts on the telecommunications industry.

We are in the process of developing a set of measures to mitigate the potential negative consequences of this risk.
Introduction of auctions for numbering capacity Description and potential impact
The Ministry of Telecom and Mass Communications of the Russian Federation prepared a draft law introducing auctions for numbering capacity, which will be open to parties who are not telecoms operators. The procedure for holding such auctions is expected to be defined by the Ministry of Telecom and Mass Communications; in addition, a state-run information system will be set up to keep tabs on the utilisation of allocated numbering capacity. This initiative, if implemented, will mean tougher sanctions for non-utilisation of allocated numbering capacity.

Individuals and legal entities shall be entitled to participate in auctions along with telecom operators.
Risk mitigation
The concept of the draft law provides for non-transparent arrangements for numbering capacity allocation and entails additional expenses both for the Russian budget and for telecom operators. The draft law needs careful examination for corruption potential.
Risk of changes in the set-up of data communications networks of federal government bodies Description and potential impact
On 24 November 2014, the Government of the Russian Federation amended the procedure for setting up data communications networks of federal government bodies.

Such bodies have now been given the right to connect to data communications networks which are part of the infrastructure of government services administered by one of the communications operators. In 2015, the Ministry of Telecom and Mass Communications issued a decree to support the implementation of this initiative, and systematic guidelines were developed for the design of data communications networks of federal government bodies. The implementation of this regulatory initiative could result in the Company losing a share of the B2G segment of the data transfer and telematics services market.
Risk mitigation
Services that are rendered to federal government bodies represent a significant part of the services provided by the Company in the B2G market. We are carefully monitoring this change to the procedure and developing measures to minimise possible market share losses.
Risk of the introduction of minimum communications service quality parameters Description and potential impact
Legislation in the Russian Federation currently does not contain provisions specifically requiring compliance by communications service providers with minimum quality parameters. The regulator’s current philosophy is that the quality of communications services will be assured as long as subscribers have the right to select their communications operator, based on operators’ mandatory provision of information about service quality.
Risk mitigation
The chances that compliance with minimum parameters for service quality will be required in the medium term are not significant. However, even if the regulator changes its current approach, the Company believes that it will be able to ensure its services comply with any such minimum parameters.
Risk of new regulations requiring mobile operators to sign mvno agreements Description and potential impact
At present, Russian law does not require a mobile network operator to grant virtual operators access to its infrastructure.
Risk mitigation
We consider the risk of a change in the regulator’s approach to the regulation of MVNO arrangements in the Russian Federation as possible. If this risk materialises, it could adversely affect MegaFon’s and its subsidiaries’ operations.
Risk of additional costs relating to enhanced regulation of personal data on the internet and big data Description and potential impact
 In 2015, significant changes in the field of processing internet users’ personal data were made. In particular, from 1 September 2015, in the process of personal data collection, Russian citizens’ personal data must be recorded, systematised, accumulated, stored, clarified and retrieved with the use of databases located within the territory of Russia. Further amendments to the regulation of Internet users’ personal data and Big Data processing are expected to be introduced in the future. Specifically, in accordance with the list of instructions issued by the Russian President following the meeting with participants of the First Russian Internet Economy Forum that took place on 22 December 2015, federal executive authorities are to present their legislative proposals on regulation of the processing on the internet of personal data of Russian citizens.
Risk mitigation
We fully comply with the current legislation, in as much as the personal data of all of our subscribers are processed within the territory of the Russian Federation. In addition, we believe that we will be able to fully comply with any additional requirements. However, the implementation of possible new requirements may entail additional costs for the Company.
Risk of the introduction of charges for internet users (global licence initiative) Description and potential impact
The Ministry of Culture has proposed a draft law providing for a global licence for internet users to access third-party content (audio, visual, or written), under which internet users will be given the right to download and use such content, with the cost of such use being charged to the subscriber by the internet access provider and being paid by the provider to the owner of the content (or any organisation managing the owners’ rights on a collective basis).
Risk mitigation
In 2015, the Presidential Administration shelved plans to further develop this initiative as unfeasible. We are carefully monitoring these possible developments to ensure that, if any of them are implemented, we are able to develop measures to minimise any potentially adverse impact on our business.
Net neutrality regulation Description and potential impact
In 2015–2016, a working group within the Federal Antimonopoly Service discussed the principles of net neutrality, which is defined as a framework for interaction between end users and content, application and service providers with telecom operators that ensures open and non-discriminatory use of the internet to distribute and access information and services. If a strict approach to net neutrality is implemented through legislation, operators will not be able to differentiate between internet traffic in any way, which may lead to networks being overloaded with heavy content.
Risk mitigation
We are closely monitoring all relevant initiatives and are working with regulatory authorities to develop a “moderate” approach to the net neutrality, which would create a favourable environment for telecoms development, help attract investments and encourage innovations, and promote the free development of competition so that internet-based business is conducted and internet traffic is transferred based on market mechanisms.
Communication lines construction Description and potential impact
New provisions of urban development legislation will take effect in 2016 requiring the development of an extensive project (land surveying) plan in order to obtain a permit for the construction of communication line facilities. Given the new requirements and the fact that the required forms of land-use planning documents are not yet available in a number of constituent entities of the Russian Federation, starting from 2016, the construction and upgrade of communication facilities will become a significantly more difficult process, potentially leading to a slowdown in communications networks development and deployment of new technologies in Russian regions, as well as the slowdown of the industry development in general.
Risk mitigation
We are closely monitoring the manner in which this new urban construction legislation may be applied, to minimise any potentially adverse impact on our business. If the construction of line facilities becomes more challenging, it is expected that the regulation might be eased.
Risk of having to move overhead telecoms lines underground Description and potential impact
In 2013–2014, the administrations of a number of major Russian cities passed resolutions requiring overhead telecoms lines to be buried underground. In particular, in 2014, the Government of Moscow adopted a draft resolution On Approval of the Deployment Procedure for Overhead Power and Telecoms Lines in the City of Moscow, which in effect prohibits the deployment of telecoms lines overhead. The likelihood of the draft resolution being passed is regarded as high. Nevertheless, it is expected that the requirement for relocation of existing telecoms lines will only apply to the historical city centre and areas along major highways. Given that operators’ relocation costs are not expected to be reimbursed from the government’s budget, this initiative could result in significant expenses for operators, reduced connectivity, and increased costs of telecoms services.
Risk mitigation
We are developing integrated measures to mitigate the risk of additional costs relating to the reconstruction and relocation of existing overhead telecoms lines. We are also working on measures to prevent breaches of network integrity or security.
Other regulatory risks Description and potential impact
There are a number of other regulatory initiatives being proposed at various levels of government which, if implemented, could have a negative effect on our business, operations and prospects.
Risk mitigation
We are carefully monitoring these possible developments to ensure that, if any are adopted, their final form will minimise any potential adverse impact on our business, operations and prospects.


Risk of failure to protect insider information Description and potential impact
As a public company, MegaFon is obliged to ensure the security of its insider information. Insider information is information which is directly or indirectly linked to the Company’s operations and/or its securities, which has not been publicly disclosed and may have an impact on the share price.

Under Russian and English laws, the Company and its employees have responsibilities to ensure proper usage and protection of insider information. Failure to discharge these responsibilities could result in claims by regulators and investors and financial and reputational damage.
Risk mitigation
To prevent this risk MegaFon is introducing safeguards to ensure the security of insider information, every year making improvements to its data security framework.

In 2012, the Board of Directors approved a number of regulations governing the use of insider information. In 2013-2015, the Company introduced a number of internal procedures restricting access to insider information and started implementing special technical tools for the protection of insider information, including protection of information on mobile devices.

In addition, employees are regularly trained and tested to increase their awareness of insider information protection.   

The Company’s Audit Committee oversees the execution of these measures, which are designed to ensure that all shareholders and investors are treated equally in their access to data and information.
Risks related to improper or inaccurate disclosure Description and potential impact
As a public company, we are exposed to the risk of claims against our Directors and top managers from regulatory authorities, shareholders and investors for improper and/or untimely disclosure of information affecting the Company’s business, operations or prospects as well as disclosure of incomplete, confusing or contradictory information.
Risk mitigation
To limit the extent of potential losses or costs incurred by our Directors, our officers or the Company as a result of legal claims related to improper or inaccurate disclosure, we have obtained insurance covering these risks - Directors’ and Officers’ Liability Policy. This policy protects the Company and its Directors against claims of third parties in respect of mistakes or omissions that could potentially occur in the course of regular management activity.


Risk of adverse changes in FX rates Description and potential impact
Description and potential impact Some of our capital expenditures, liabilities and operating expenses (roaming and interconnect charges, frequency fees, etc.) are denominated in foreign currencies, mostly in US Dollars or Euros. The recent rouble depreciation (the Rouble fell from RUB 56.24 per US Dollar as at 1 January 2015 to RUB 72.88 per US Dollar as at 31 December 2015) could increase such expenses in rouble terms, result in foreign exchange losses and thereby reduce our net income.

Risk mitigation
Furthermore, since some of the Company’s debt is denominated in US Dollars or Euros, further depreciation of the Rouble against the US Dollar and/or the Euro could make it more difficult for the Company to repay or refinance such debt.
We negotiated with counterparties (vendors, service providers, etc.) to accept      payments in, or switch payments to Roubles, or to fix a specific exchange rate for the purpose of payments under contracts.

With respect to the latter, MegaFon has access to adequate funding through the credit facilities it has opened for the purchase of equipment from foreign suppliers, which enables FX liquidity replenishment as needed for equipment purchases.

To offset foreign exchange losses (or gains) and cover our FX-denominated CAPEX and OPEX requirements we hold the vast majority of our bank deposits in US Dollars.

In order to reduce the negative impact of changes in foreign exchange rates on the Company's financial liabilities, MegaFon has also hedged a  part of its debt portfolio which is denominated in foreign currencies. We plan to continue our hedging initiatives in 2016.
Interest rate risk Description and potential impact
Interest rate risk is the risk of loss arising from adverse movements in interest rates on liabilities and off-balance-sheet instruments. Any increase in rates could increase the costs of raising new financing for the Company’s operations and investments and, where existing financing carries a floating rate, the costs of servicing such debt.
Risk mitigation
In 2015, we continued the implementation of our strategy of limiting the use of floating-rate financing. As a result, around 80%2 of our debt portfolio has fixed rates, while the Company has no rouble-denominated facilities with interest rates tied to the key rate of the Central Bank of Russia.

A major portion of the Company’s funding portfolio is long-term and has been sourced at attractive interest rates.

Around 55% of the amounts outstanding become due in three years or later, providing us with sufficient headroom to refinance through the current elevated interest rate environment.

1  According to AC&M-Consulting.
2  Including swaps.