Use these links to rapidly review the documentTABLE OF CONTENTS OAO ROSTELECOM CONSOLIDATED FINANCIAL STATEMENTS PREPARED IN ACCORDANCE WITH INTERNATIONAL FINANCIAL REPORTING STANDARDS

Filed with the Securities and Exchange Commission on December 17, 2007



UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549

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Form 20-F

|o                                                 | Registration Statement pursuant to Section 12(b) or (g) of the Securities Exchange Act of 1934                                  
|------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------
|or                                               
|ý                                                 | Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2006
|or                                               
|o                                                 | Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934                                        
|or                                               
|o                                                 | Shell company report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934                                     
|Date of event requiring this shell company report

Commission file number: 1-14748

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OPEN JOINT STOCK COMPANY LONG-DISTANCE AND INTERNATIONAL

TELECOMMUNICATIONS "ROSTELECOM"

(Exact name of Registrant as specified in its Charter)

RUSSIAN FEDERATION(Jurisdiction of incorporation or organization) 14, 1st Tverskaya-Yamskaya Street, Moscow 125047, Russian Federation(Address of Principal Executive Offices)

Securities
registered or to be registered pursuant to Section 12(b) of the Act:

Title of Each Class

Name of Each Exchange on Which RegisteredAMERICAN DEPOSITARY SHARES,
EACH REPRESENTING SIX ORDINARY SHARES

NEW YORK STOCK EXCHANGEORDINARY SHARES, PAR VALUE0.0025 RUSSIAN RUBLES PER SHARE

NEW YORK STOCK EXCHANGE(1)


Securities
registered or to be registered pursuant to Section 12(g) of the Act: NONE
(Title of Class)Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: NONE
(Title of Class)

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Indicate the number of outstanding shares of each of the issuer's classes of capital or common stock as of the close of the period covered by the
annual report.

728,696,320
ordinary shares, par value 0.0025 Russian rubles each, as of December 31, 2006.

7,217,834
American Depositary Shares, each representing six ordinary shares, as of December 31, 2006.

Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

o
Yes ý No

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13
or 15(d) of the Securities Exchange Act of 1934.

o
Yes ý No

NoteChecking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 from their obligations under those Sections.

Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

ý
Yes o No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated file, or a non-accelerated filer. See definition of
"accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check One):

Large accelerated filer ý

Accelerated Filer o

Non-accelerated filer o


Indicate
by check mark which financial statement item the registrant has elected to follow.
o Item 17 ý Item 18

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).

o
Yes ý No

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TABLE OF CONTENTS



|ITEM 1.  |    | IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS
|-------- | -- | -----------------------------------------------------
|ITEM 2.  |    | OFFER STATISTICS AND EXPECTED TIMETABLE              
|ITEM 3.  |    | KEY INFORMATION                                      
|         | A. |                                                      
|         | B. |                                                      
|         | C. |                                                      
|         | D. |                                                      
|ITEM 4.  |    | INFORMATION ON THE COMPANY                           
|         | A. |                                                      
|         | B. |                                                      
|         | C. |                                                      
|         | D. |                                                      
|ITEM 4A. |    | UNRESOLVED STAFF COMMENTS                            
|ITEM 5.  |    | OPERATING AND FINANCIAL REVIEW AND PROSPECTS         
|         | A. |                                                      
|         | B. |                                                      
|         | C. |                                                      
|         | D. |                                                      
|         | E. |                                                      
|         | F. |                                                      
|ITEM 6.  |    | DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES           
|         | A. |                                                      
|         | B. |                                                      
|         | C. |                                                      
|         | D. |                                                      
|         | E. |                                                      
|ITEM 7.  |    | MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS    
|         | A. |                                                      
|         | B. |                                                      
|         | C. |                                                      
|ITEM 8.  |    | FINANCIAL INFORMATION                                
|         | A. |                                                      
|         | B. |                                                      
|ITEM 9.  |    | THE OFFER AND LISTING                                
|         | A. |                                                      
|         | B. |                                                      
|         | C. |                                                      
|         | D. |                                                      
|         | E. |                                                      
|         | F. |                                                      
|ITEM 10. |    | ADDITIONAL INFORMATION                               
|         | A. |                                                      
|         | B. |                                                      
|         | C. |                                                      
|         | D. |                                                      
|         | E. |                                                      
|         | F. |                                                      
|         | G. |                                                      
|         |    |                                                      

i

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|          | H. |                                                                              | DOCUMENTS ON DISPLAY                 
|--------- | -- | ---------------------------------------------------------------------------- | -------------------------------------
|          | I. |                                                                              | SUBSIDIARY INFORMATION               
|ITEM 11.  |    | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                  
|ITEM 12.  |    | DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES                      
|ITEM 13.  |    | DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES                             
|          | A. |                                                                              | DEFAULTS                             
|          | B. |                                                                              | DIVIDEND ARREARAGES AND DELINQUENCIES
|ITEM 14.  |    | MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
|ITEM 15.  |    | CONTROLS AND PROCEDURES                                                     
|ITEM 16A. |    | AUDIT COMMITTEE FINANCIAL EXPERT                                            
|ITEM 16B. |    | CODE OF ETHICS                                                              
|ITEM 16C. |    | PRINCIPAL ACCOUNTANT FEES AND SERVICES                                      
|ITEM 16D. |    | EXEMPTION FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES                   
|ITEM 16E. |    | PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS      
|ITEM 17.  |    | FINANCIAL STATEMENTS                                                        
|ITEM 18.  |    | FINANCIAL STATEMENTS                                                        
|ITEM 19.  |    | EXHIBITS                                                                    

As used in this annual report, "Rostelecom," "the company," "the group" "we," "us" or "our" refers to Open Joint Stock Company
Long-Distance and International Telecommunications Rostelecom and its consolidated subsidiaries.

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We
publish our consolidated financial statements in Russian rubles. In this annual report, (i) references to "RUR" and "rubles" are to Russian rubles; (ii) references to
"U.S.$" and "U.S. dollars" are to United States dollars; (iii) references to "JPY" are to Japanese yen; and (iv) references to "EUR" and "euro" are to the common currency of the European
Economic and Monetary Union. Unless otherwise indicated, all RUR figures as of and for the year ended of December 31, 2002 have been restated in terms of the ruble purchasing power current as
of December 31, 2002.

For
convenience only (except where noted otherwise), certain RUR figures for 2006 have been converted into U.S. dollars at the rate of RUR 26.33 = U.S.$1.00, which was the
exchange rate published by the Central Bank of the Russian Federation, or the Central Bank, for December 31, 2006. These conversions should not be construed as a representation that the RUR
amounts actually represent such U.S. dollar amounts or could be converted into U.S. dollars at the rate indicated. The ruble is not a convertible currency outside the territory of the Russian
Federation. For more information, see "Item 10. Additional InformationD. Exchange Controls."

ii

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LEGEND OF TERMS

The abbreviations of certain terms set forth below relate to the telecommunications industry and our activities, in particular, and appear
throughout this document.

ASN:Automatic switching node

ATE:Automatic trunk exchange

CCC:Customer Care Center

CSPs:Contracted Service Providers

DLD:Domestic long-distance

DRRL:Digital radio-relay line

DWDM:Dense wavelength division multiplexing

FAC:Federal Agency on Communications

FAS:Federal Anti-Monopoly Service

FOL:Fiber optic line

FSFM:Federal Service for Financial Markets

FST:Federal Service on Tariffs

IFS:International free service

ILD:International long-distance

IP:Internet-Protocol

IRC:Inter-regional company

ISC:International switching center

ISDN:Integrated services digital network

ITE:International trunk exchange

ITU:International Telecommunications Union

PSTN:Public switched telephone network

MPLS:Multi-Protocol Label Switching

SDH:Synchronous Digital Hierarchy

SPAs:Service Provision Agreements

STM:Synchronous Transport Module

VoIP:Voice over Internet Protocol

VPN:Virtual Private Network

iii

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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

Matters discussed in this document may constitute forward-looking statements within the meaning of Section 27A of the U.S. Securities Act of 1933
(the "U.S. Securities Act") and Section 21E of the U.S. Securities Exchange Act of 1934 (the "U.S. Exchange Act"). The Private Securities Litigation Reform Act of 1995
provides safe harbor protections for forward-looking statements in order to encourage companies to provide prospective information about their businesses. Forward-looking statements include statements
concerning plans, objectives, goals, strategies, future events or performance, and underlying assumptions and other statements, which are other than statements of historical facts.

We
desire to take advantage of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and are including this cautionary statement in connection with this safe
harbor legislation and other relevant law. This document and any other written or oral statements made by us or on our behalf may include forward-looking statements, which reflect our current views
with respect to future events and financial performance. The words "believe," "expect," "anticipate," "intend," "estimate," "forecast," "project," "predict," "plan," "will," "may," "should," "could"
and similar expressions identify forward-looking statements. Forward-looking statements appear in a number of places including, without limitation, "Item 3. Key InformationD. Risk
Factors," "Item 4. Information on the CompanyB. Business Overview" and "Item 5. Operating and Financial Review and Prospects," and include statements regarding:



The
forward-looking statements in this document are based upon various assumptions, many of which are based, in turn, upon further assumptions, including without limitation, management's
examination of historical operating trends, data contained in our records and other data available from third parties. Although we believe that these assumptions were reasonable when made, these
assumptions are inherently subject to significant uncertainties and contingencies which are difficult or impossible to predict and are beyond our control. Therefore, we cannot assure you that we will
achieve or accomplish these expectations, beliefs or projections. In addition to these important factors and matters discussed elsewhere herein and in the documents incorporated by reference herein,
important factors that, in our view, could cause actual results to differ materially from those discussed in the forward-looking statements include the achievement of the anticipated levels of
profitability and growth, the development and impact of regulatory initiatives, the timely development and acceptance of new services and products, the impact of competitive pricing, the ability to
obtain necessary regulatory approvals, the condition of the economies of Russia and certain other CIS countries, political stability in Russia and certain other CIS countries, the impact of general
business and global economic conditions and other important factors described herein and from time to time in the reports filed by us with the U.S. Securities and Exchange Commission, or
the SEC.

Except
to the extent required by law, neither we, nor any of our respective agents, employees or advisors intends or has any duty or obligation to supplement, amend, update or revise any
of the forward-looking statements contained in this document.

iv

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PART I

Item 1.Identity of Directors, Senior Management and Advisors

Not applicable.

Item 2.Offer Statistics and Expected Timetable

Not applicable.

Item 3.Key Information

A.    Selected Financial Data

The selected financial data as of and for the years ended December 31, 2006, 2005 and 2004 presented below have been derived from, and are qualified by
reference to, our consolidated financial statements, including the notes thereto, included elsewhere in this annual report. Selected financial data as of and
for the years ended December 31, 2003 and 2002 have been derived from our previously published consolidated financial statements not included in this annual report. Our consolidated financial
statements have been prepared in accordance with International Financial Reporting Standards, or IFRS. The information below should be read in conjunction with "Item 5. Operating and Financial
Review and Prospects" and our consolidated financial statements and notes included elsewhere in this annual report.

IFRS
differs in certain significant respects from accounting principles generally accepted in the United States, or U.S. GAAP. For a discussion of the principal differences
between IFRS and U.S. GAAP inasmuch as they relate to us, see Note 33 to our consolidated financial statements. Unless otherwise indicated, the following selected financial data
as of and for the years ended December 31, 2006, 2005, 2004, 2003 and 2002 are presented in millions of rubles. The following selected financial data for the year ended December 31, 2002
are restated in terms of the ruble purchasing power current as of December 31, 2002. Per share amounts are expressed in rubles.

|                                                         |  | Years Ended December 31, | 
|-------------------------------------------------------- |  | ------------------------ | 
|
|Telephone traffic                                        |  |                          | 
|Domestic long-distance traffic                           |  | 31,370                   | 
|Outgoing international long-distance traffic             |  | 13,271                   | 
|Incoming and transit international long-distance traffic |  | 4,480                    | 
|                                                         |  |                          | 
|Total telephone traffic                                  |  | 49,121                   | 
|                                                         |  |                          | 
|Rent of channels                                         |  | 7,116                    | 
|                                                         |  |                          | 
|Other revenue                                            |  |                          | 
|Television and radio transmission                        |  | 528                      | 
|Satellite services                                       |  | 559                      | 
|Internet access                                          |  | 217                      | 
|FreePhone services                                       |  | 761                      | 
|Miscellaneous revenue                                    |  | 3,257                    | 
|                                                         |  |                          | 
|Total other revenue                                      |  | 5,322                    | 
|                                                         |  |                          | 
|Total Revenue                                            |  | 61,559                   | 
|                                                         |  |                          | 
|                                                         |  |                          | 

1

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|Wages, salaries, other benefits and payroll taxes                                                           |  | 7,147  |   | 6,242  |   | 5,109  |   | 3,946  |   | 3,476  |  
|----------------------------------------------------------------------------------------------------------- |  | ------ | - | ------ | - | ------ | - | ------ | - | ------ | -
|Depreciation                                                                                                |  | 8,418  |   | 7,136  |   | 7,498  |   | 8,252  |   | 9,089  |  
|Impairment of property, plant and equipment                                                                 |  |       |   | 4,970  |   |       |   |       |   |       |  
|Charges by network operatorsinternational                                                                  |  | 7,304  |   | 7,059  |   | 6,484  |   | 5,913  |   | 5,779  |  
|Charges by network operatorsnational                                                                       |  | 29,355 |   | 8,741  |   | 7,883  |   | 4,053  |   | 1,707  |  
|Other operating expenses                                                                                    |  | 8,030  |   | 6,407  |   | 5,339  |   | 6,918  |   | 5,904  |  
|                                                                                                            |  |        |   |        |   |        |   |        |   |        |  
|Total operating expenses                                                                                    |  | 60,254 |   | 40,555 |   | 32,313 |   | 29,082 |   | 25,955 |  
|                                                                                                            |  |        |   |        |   |        |   |        |   |        |  
|Operating profit                                                                                            |  | 1,305  |   | 400    |   | 5,005  |   | 2,185  |   | 1,898  |  
|Gain/(loss) from associates                                                                                 |  | 19     |   | 169    |   | (25    | ) | 115    |   | 314    |  
|Net interest and other non-operating income/loss, including monetary gain                                   |  | 1,119  |   | 1,104  |   | 639    |   | 1,447  |   | 1,622  |  
|                                                                                                            |  |        |   |        |   |        |   |        |   |        |  
|Income before tax and minority interest                                                                     |  | 2,443  |   | 1,673  |   | 5,619  |   | 3,747  |   | 3,834  |  
|                                                                                                            |  |        |   |        |   |        |   |        |   |        |  
|Income tax (expense)/benefit                                                                                |  | (987   | ) | (695   | ) | (1,353 | ) | (222   | ) | (967   | )
|                                                                                                            |  |        |   |        |   |        |   |        |   |        |  
|Income after taxation from continuing operations                                                            |  | 1,456  |   | 978    |   | 4,266  |   | 3,525  |   | 2,867  |  
|                                                                                                            |  |        |   |        |   |        |   |        |   |        |  
|Net loss from discontinued operations, net of tax, including write-down of property, plant and equipment(1) |  |       |   |       |   |        |   | (2,459 | ) | (1,098 | )
|                                                                                                            |  |        |   |        |   |        |   |        |   |        |  
|Net income/(loss)                                                                                           |  | 1,456  |   | 978    |   | 4,266  |   | 1,066  |   | 1,769  |  
|                                                                                                            |  |        |   |        |   |        |   |        |   |        |  
|Attributable to:                                                                                            |  |        |   |        |   |        |   |        |   |        |  
|Equity holders of the parent                                                                                |  | 1,458  |   | 978    |   | 4,266  |   | 346    |   | 698    |  
|Minority interestcontinuing operations                                                                     |  | (2     | ) |       |   |       |   | 70     |   | (82    | )
|Minority interestdiscontinuing operations                                                                  |  |       |   |       |   |       |   | 650    |   | 1,153  |  
|Earnings/(loss) per Share (rubles)basic and diluted                                                        |  | 1.50   |   | 1.01   |   | 4.39   |   | 1.10   |   | 1.82   |  
|Earnings/(loss) per Share (rubles)continuing operations                                                    |  | 1.50   |   | 1.01   |   | 4.39   |   | 3.63   |   | 2.95   |  
|Loss per Share (rubles)discontinued operations                                                             |  |       |   |       |   |       |   | (2.53  | ) | (1.13  | )
|Earnings/(loss) per ADS (rubles)basic and diluted(2)                                                       |  | 9.00   |   | 6.06   |   | 26.34  |   | 6.60   |   | 10.92  |  
|Earnings/(loss) per ADS (rubles)continuing operations(2)                                                   |  | 9.00   |   | 6.06   |   | 26.34  |   | 21.78  |   | 17.70  |  
|Loss per ADS (rubles)discontinued operations(2)                                                            |  |       |   |       |   |       |   | (15.18 | ) | (6.78  | )
|Per share dividend on preferred share (rubles)(3)                                                           |  | 3.72   |   | 2.97   |   | 3.25   |   | 1.27   |   | 0.96   |  
|Per share dividend on ordinary share (rubles)(3)                                                            |  | 1.56   |   | 1.46   |   | 0.88   |   | 0.54   |   | 0.22   |  
|Amounts in accordance with U.S. GAAP                                                                        |  |        |   |        |   |        |   |        |   |        |  
|Total revenues                                                                                              |  | 61,559 |   | 40,955 |   | 37,318 |   | 31,267 |   | 27,853 |  
|Total operating expenses                                                                                    |  | 61,816 |   | 37,039 |   | 33,006 |   | 29,725 |   | 26,389 |  
|Operating profit/(loss)                                                                                     |  | (257   | ) | 3,916  |   | 4,312  |   | 1,542  |   | 1,464  |  
|Net income from continuing operations                                                                       |  | 271    |   | 3,452  |   | 3,871  |   | 3,106  |   | 2,598  |  
|Net loss from discontinued operations                                                                       |  |       |   |       |   |       |   | (3,086 | ) | (2,273 | )
|Net income/(loss)                                                                                           |  | 271    |   | 3,452  |   | 3,871  |   | 20     |   | 325    |  
|Earnings/(loss) per Share (rubles)basic and diluted                                                        |  | 0.28   |   | 3.55   |   | 3.98   |   | (0.02  | ) | (0.33  | )
|Earnings/(loss) per Share (rubles)continuing operations                                                    |  | 0.28   |   | 3.55   |   | 3.98   |   | 3.20   |   | 2.67   |  
|Loss per Share (rubles)discontinued operations                                                             |  |       |   |       |   |       |   | (3.18  | ) | (2.34  | )
|Earnings/(loss) per ADS (rubles)basic and diluted(2)                                                       |  | 1.68   |   | 21.30  |   | 23.88  |   | (0.12  | ) | 1.98   |  
|Earnings/(loss) per ADS (rubles)continuing operations(2)                                                   |  | 1.68   |   | 21.30  |   | 23.88  |   | 19.20  |   | 16.02  |  
|Loss per ADS (rubles)discontinued operations(2)                                                            |  |       |   |       |   |       |   | (19.02 | ) | (14.04 | )
|Per ADS dividend on ordinary share (US$)(4)                                                                 |  | 0.36   |   | 0.30   |   | 0.19   |   | 0.11   |   | 0.04   |  

2

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|                                                                           |  | Years Ended December 31, |  
|-------------------------------------------------------------------------- |  | ------------------------ | -
|
|BALANCE SHEET DATA                                                         |  |                          |  
|Amounts in accordance with IFRS                                            |  |                          |  
|Non-current assets                                                         |  | 48,110                   |  
|Current assets                                                             |  | 20,388                   |  
|                                                                           |  |                          |  
|Total assets                                                               |  | 68,498                   |  
|                                                                           |  |                          |  
|Total shareholders' equity and minority interest                           |  | 50,945                   |  
|Current liabilities                                                        |  | 12,696                   |  
|Non-current liabilities                                                    |  | 1,413                    |  
|Deferred tax liability                                                     |  | 3,444                    |  
|                                                                           |  |                          |  
|Total shareholders' equity, minority interest and liabilities              |  | 68,498                   |  
|                                                                           |  |                          |  
|Amounts in accordance with U.S. GAAP                                       |  |                          |  
|Total assets                                                               |  | 72,975                   |  
|Long-term liabilities                                                      |  | 5,869                    |  
|Total shareholders' equity and minority interest                           |  | 54,306                   |  
|STATEMENT OF CASH FLOWS                                                    |  |                          |  
|Net cash provided by operating activities                                  |  | 7,421                    |  
|Net cash used in investing activities                                      |  | (4,456                   | )
|Net cash provided by/(used in) financing activities                        |  | (3,004                   | )
|Effect of exchange rate changes and inflation on cash and cash equivalents |  | (6                       | )
|                                                                           |  |                          |  
|Net (decrease)/increase in cash and cash equivalents                       |  | (45                      | )
|                                                                           |  |                          |  
|SELECTED STATISTICAL DATA                                                  |  |                          |  
|International telephone minutes (million)                                  |  |                          |  
|Incoming                                                                   |  | 2,461                    |  
|Outgoing                                                                   |  | 1,933                    |  
|Domestic long-distance minutes (million)                                   |  | 9,722                    |  

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Effective August 1, 2003, the government anti-monopoly authority implemented a new system for settlements between us, on the
one hand, and regional operators of the Svyazinvest Group, or Inter-regional companies (IRCs), and alternative operators, on the other hand, under which we began to bill operators originating DLD
calls using one settlement rate and to pay to operators terminating the calls a termination fee based on another settlement rate. Before this change, we made no payments for termination and recognized
revenue for processing traffic originating in networks of other operators on the basis of a single settlement rate, on a net basis. See "Item 4. Information on the CompanyB.
Business OverviewServicesDomestic Tariffs."

3

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The
pro-forma information calculated on the basis of the new settlement system as if it was applied effective January 1, 2002 is presented below in millions
of rubles.

|                             |  | 2003   |   | 2002   |  
|---------------------------- |  | ------ | - | ------ | -
|
|Revenue from local operators |  | 12,396 |   | 11,159 |  
|Charges by network operators |  | (8,058 | ) | (7,007 | )

In 2005, new rules and regulations governing the national telecommunications sector were enacted by the Ministry of Information Technologies and
Communications, or Mininformsvyaz, as part of the regulatory reform and restructuring of the national telecommunications sector aimed at facilitating competition and making the industry more
attractive for investors. The new rules and regulations came into effect on January 1, 2006 and introduced a new scheme governing the relationships between the providers of DLD/ILD services and
end users, and effectively ended our monopoly over the provision of long-distance telecommunications services in Russia.

Prior
to January 1, 2006, we provided international and DLD traffic throughput services to Russian operators, including to each of Russia's seven Svyazinvest IRCs and other local
operators. In Moscow, we provided DLD/ILD telecommunications services to subscribers through the local access network of a local operator, and billed customers directly. IRCs and other operators
independently billed for long-distance services provided to their local network subscribers (except for subscribers in Moscow). The operators settled with us for long-distance
call transit and termination services, and we, in turn, paid the respective operator for call termination services.

Starting
January 1, 2006, under the new scheme, we provide DLD/ILD services directly to end users and bill them for DLD/ILD services rendered in all regions of Russia, while the
inter-regional and local operators provide us with inter-regional and local call origination and termination services, respectively, and charge us for these services.

For
additional information, see Note 3 to our consolidated financial statements.

Exchange Rates

The table below sets forth, for the periods and dates indicated, high, low, average, and period-end rates of the Central Bank for the purchase of U.S.
dollars, expressed in Russian rubles per one U.S. dollar. No representation is made that the Russian ruble or U.S. dollar amounts referred to herein could have been or could be converted into
U.S. dollars or Russian rubles, as the case may be, at any particular rate. The Russian ruble is not a convertible currency outside the territory of the Russian Federation and is subject to
significant restrictions on trading within the territory of Russia. See also "Item 10. Additional InformationD. Exchange Controls."

|                        |  | Rubles per U.S. dollar
|----------------------- |  | ----------------------
|
|Year ended December 31, |  |                       
|2006                    |  | 28.48                 
|2005                    |  | 29.00                 
|2004                    |  | 29.45                 
|2003                    |  | 31.88                 
|2002                    |  | 31.86                 

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4

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|               |  | Rubles per U.S. dollar
|-------------- |  | ----------------------
|
|November 2007  |  | 24.68                 
|October 2007   |  | 25.06                 
|September 2007 |  | 25.70                 
|August 2007    |  | 25.84                 
|July 2007      |  | 25.73                 
|June 2007      |  | 26.05                 
|May 2007       |  | 25.92                 
|April 2007     |  | 26.01                 
|March 2007     |  | 26.24                 
|February 2007  |  | 26.55                 
|January 2007   |  | 26.58                 
|December 2006  |  | 26.39                 

On December 14, 2007, the exchange rate between the ruble and the U.S. dollar was 24.43 rubles per $1.00.

The
following table shows the rates of inflation in Russia for the years indicated:

|                        |  | Inflation rate |  
|----------------------- |  | -------------- | -
|Year ended December 31, |  |                |  
|2006                    |  | 9.0            | %
|2005                    |  | 10.9           | %
|2004                    |  | 11.7           | %
|2003                    |  | 12.0           | %
|2002                    |  | 15.1           | %

---

Source: Rosstat.

B.    Capitalization and Indebtedness

Not applicable.

C.    Reasons for the Offer and Use of Proceeds

Not applicable.

D.    Risk Factors

An investment in our shares and ADSs involves a high degree of risk. You should carefully consider the following information about these
risks, together with the information contained in this annual report, before you decide to buy our shares or ADSs. If any of the following risks actually occurs, our business, prospects, financial
condition or results of operations could be materially and adversely affected. In that case, the value of our shares and ADSs could also decline and you could lose all or part of your
investment.

We have described the risks and uncertainties that our management believes are material, but these risks and uncertainties may not be the only ones we face.
Additional risks and uncertainties, including those we currently are not aware of or deem immaterial, may also result in decreased revenues, increased expenses or other events that could result in a
decline in the value of our shares and ADSs.

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Risk Relating to the Regulatory Reform of the Russian Telecommunications Industry



Prior to January 1, 2006, we were the only nationwide DLD/ILD operator in Russia and, therefore, held a monopoly position in this market. Reform of the
Russian telecommunications industry began with the introduction of the Communications Law in 2004 and has intensified as implementing regulations have been enacted thereunder. Most significantly, the
new regulations opened up the DLD/ILD market by allowing telecommunications operators to apply for DLD/ILD telecommunications services licenses, and radically restructured our relationships with IRCs,
local operators and subscribers. However, as certain gaps remain in the new legislative framework, it is not yet entirely clear how the new regulatory regime will ultimately impact our business,
financial condition and results of operations. For additional information, see "Item 4. Information on the CompanyB. Business OverviewRegulation of the Russian
Telecommunications Industry."

Change in DLD and ILD competitive environment

New regulations have been enacted allowing operators to apply for DLD/ILD telecommunications services licenses. Among other things, operators seeking to obtain
such a license are required to have interconnection points in each of the 85 Russian regions and network capacity to offer DLD services throughout the entire territory of Russia. Approximately 30
operators are reported to have already applied for and received DLD/ILD licenses, and three operators, OJSC Multiregional Transit Telecom, or MTT, CJSC TransTelecom and GoldenTelecom, have commenced
operations. If these or other operators are successful in competing with us in providing nationwide DLD/ILD telecommunications services, we will lose our near monopoly position in the
fixed-line DLD/ILD
telecommunications sector and our market share in the fixed-line DLD/ILD services market may erode.

Radical restructuring of the provision of long-distance services to end users

Prior to January 1, 2006, we provided international and DLD traffic throughput services to Russian operators, including to each of Russia's seven IRCs and
other local operators. These operators billed their own local customers for outgoing domestic long-distance and international calls, while we, in turn, billed the operators for the traffic
throughput and termination. We had a different arrangement in Moscow, where we provided DLD/ILD telecommunications services to end users through the local access network of a local operator, and
billed customers directly.

The
new regulations that came into effect on January 1, 2006 radically restructured our relationships with IRCs, local operators and subscribers, as they require
(i) operators of DLD and ILD telephone networks to provide long-distance services directly to end users and bill these customers for such services; (ii) IRCs to provide
DLD/ILD operators with intra-regional call origination and termination services and (iii) local telephone network operators to provide IRCs with local call origination and termination services.
Thus, under this new structure, we provide services to and bill end users, IRCs provide services to and bill us, and local operators provide services to and bill IRCs, with settlements between
operators conducted in the order of the services rendered. Subscriber billing and collection activities, as well as other customer service functions, are to be performed by the DLD/ILD operator or
its agents.

As
we were previously not required to bill or directly service end users outside of Moscow prior to January 1, 2006, we do not have sufficient staff and other resources to perform
these functions. We therefore entered into service provision agreements, or SPAs, with the IRCs and other operators of

6

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local
and intra-regional networks to act as our regional agents, or Contract Service Providers (CSPs). In this capacity, the CSPs bill for telecommunications services, prepare, print and deliver
invoices and collect payments from end users and perform customer service functions. The agents are also required to furnish all information required for our management and accounting reports (in both
monetary and unit terms) and, together with us, undertake the joint reconciliation of unit amounts of services provided to end users.

In
the view of our management, the foregoing changes pose several risks, including those described below, that could have a material adverse effect on our business, financial condition,
results of operations and prospects.

Risks associated with the functional capabilities of the information and billing systems of the IRCs and other intra-regional and local operators

Under the SPAs, various financial and operational information required by us to prepare management and financial reports are tracked and recorded by the CSPs.
Thus, we are subject to material risks associated with verification and calculation of such information by the CSPs, which includes the volumes of long-distance services rendered (in price
and unit terms), invoicing, customer services provided to end users, and recognition of revenue from the provision of DLD and ILD services.

These
risks arise mainly from the lack of uniformity in the various billing systems used by the different CSPs, and joint testing of the information and billing systems of the CSPs has
shown that, in most cases, their capabilities are currently insufficient to fully carry out the functions set forth in the SPAs. It is therefore unclear whether the CSPs will be able to provide us
with timely and accurate operational and financial data and, as a result, we may have difficulty in preparing our accounting and tax records and producing accurate and timely financial and
tax reports.

In
turn, these deficiencies have had and may continue to have in the future the following consequences:



Risks associated with the servicing of end users by the CSPs on our behalf

Under the SPAs, we rely on the CSPs to perform various customer service functions. For example, the new regulations require that a contract for telecommunications
services (including for long-distance services) be executed between the operator and each end user. The regulations also require us to deliver invoices in hard copy directly to end users
for DLD and ILD services. We rely on the CSPs to perform these functions on our behalf under the SPAs. However, there is no guarantee that the CSPs will perform these tasks in a diligent and timely
manner, which could adversely affect our ability to comply with the new regulations and collect and record revenues for services rendered.

The
SPAs also require the CSPs to provide us with certain information regarding the numbering capacity of interconnected local operators and subscribers, but they often fail to do so.
Moreover,

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under
current legislation, IRCs and local operators are required to provide individual subscriber information to interconnected long-distance operators without the prior written consent of
a subscriber; however, there is a lack of procedure in place for the exchange of subscriber information in the current legislation. Such information is critical to our ability to properly record
traffic transit from subscribers and to calculate charges for services rendered and to issue invoices. The failure or inability of IRCs and local operators to provide us with subscriber information
may hinder our ability to charge and collect payments from subscribers for long-distance services.

Risks associated with the regulation of our tariffs and inter-operator settlement rates

The tariffs we charge to end users for DLD services and inter-operator settlement rates are regulated by the federal government. In particular, as we are included
in the Register of Natural Monopolies, our activities are regulated by the Federal Service on Tariffs, or the FST, in accordance with the Federal Law on Natural Monopolies, or the Natural Monopolies
Law. The Natural Monopolies Law sets out the legal framework for state regulation of the activities of telecommunications service providers, tariffs charged to end users and other activities.

In
addition, the Communications Law provides for the regulation of certain tariffs set by telecommunications operators occupying a "significant position" in a market, or "significant
operators," which the law defines as an operator holding, together with affiliates, more than 25% of the numbering capacity or throughput capacity in a particular geographic numbering zone or
throughout Russia. We were added to the list of "significant operators" in December 2005. Significant operators are regulated by the Federal Service on Supervision in the Areas of Mass Media,
Communications and Protection of
Cultural Heritage, or Rossvyazokhrancultura. Prior to March 2007, the Federal Service on Supervision in the Areas of Communications, or Rosssvyaznador, regulated significant operators. For additional
information, see "Item 4. Information on the CompanyB. Business OverviewRegulation of the Russian Telecommunications Industry."

Currently,
our tariffs for DLD services are regulated by the FST. Inter-operator settlement rates, including rates for call origination, termination and transit charged by significant
operators are regulated by Rossvyazokhrancultura. Because inter-operator settlement rates for call origination and termination are a substantial component of the long-distance rates
charged to end users, any changes in the inter-operator settlement rates could have a significant impact on our financial condition and results of operations.

An
additional amount called the "compensation surcharge" is also payable by intra-regional and/or DLD/ILD operators to local and intra-regional operators, respectively, for the
initiation of intra-regional and DLD/ILD calls, respectively, in order to compensate for losses incurred by local operators. The amount of the compensation surcharge is determined by the FST based on
the amounts paid by a local operator to cover the difference between its revenues from intra-regional and local telecommunications services rendered at regulated tariffs and its economically
justifiable costs relating to such services. In determining the compensation surcharge, the FST applies a certain profit margin as well. In accordance with Government Decree No. 627, the
compensation surcharge will remain in effect until January 1, 2008. However, it is possible that the compensation surcharge will be extended beyond this date. The compensation surcharge
substantially reduces the portion of the total DLD/ILD tariff we ultimately receive.

Consequently,
our revenue from the provision of DLD services and a significant portion of our costs, comprised of inter-operator settlements and the compensation surcharge, are based on
tariffs and rates set by the government. The extensive and multi-tiered regulation of our tariffs and other fees may restrict our ability to charge tariffs that adequately compensate us for our costs
or to set market-based, competitive tariffs that would enable us to maintain or increase our profits and compete with other DLD/ILD service providers whose tariffs are not subject to government
regulation.

8

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Risks Relating to Our Business



Alternative operators are particularly active in the more profitable segments of the Russian telecommunications market, including mobile services, data
transmission services and domestic and international telecommunications services. In 2006, alternative operators continued to expand their presence in the telecommunications services market, and the
Russian market for DLD/ILD services is becoming increasingly competitive. In particular, newly licensed alternative operators began providing DLD/ILD services in 2006, which had a negative effect on
our market share. Increased competition may result in reduced operating margins and loss of market share. See "Item 4. Information on the CompanyB. Business
OverviewCompetition" for information regarding our competitors and new DLD/ILD license holders.

In
addition, the rapid development of mobile communications is allowing mobile operators greater access to the end users of telephone services nationwide. Mobile operators have the
technical capability and legal right to transit DLD traffic to public switched telephone networks, or PSTNs, through us, as well as other long-distance operators. Furthermore, MTS,
Vimpelcom and Megafon, the leading mobile operators in Russia, are reported to have received DLD/ILD licenses. Mobile operators also have the legal and technical capability to directly exchange
mobile-to-mobile traffic. Due to the mobile operators' ability to bypass our network when transmitting DLD/ILD traffic, we carried an insignificant portion of total mobile
traffic during 2006, and we may be unable to increase or maintain our share of mobile traffic in the future.



The market for DLD and ILD communications services in Moscow, the Moscow region, St. Petersburg and other commercial centers in Russia is rapidly evolving
and becoming increasingly competitive. Competition is generally based on price, product functionality, range of service offerings and customer service. The consolidation of smaller operators and/or
their acquisition by larger operators may further increase competition. Increased competition, including from the potential introduction of new DLD/ILD licensed operators in Russia, may adversely
affect our ability to increase the number of our subscribers and could result in reduced operating margins and a loss of market share, as well as different pricing, service or marketing policies.

In
particular, the Moscow telecommunications market is highly competitive, especially in the corporate customer segment. Our share in the Moscow DLD and ILD services market has declined
in the last few years, particularly in the corporate customer segment. Because competing operators are smaller
and tend to be more flexible in their tariff policy, our market share in Moscow may continue to decline, thereby limiting the growth of our revenues from Moscow end-user subscribers and
potentially having a material adverse effect on our financial condition and results of operations.



The active development and promotion of IP-telephony services may significantly increase competition in the Russian long-distance market.
Certain IP-telephony service providers offer free calls between users of IP-telephony, as well as significantly discounted calls to users on PSTN and mobile networks. In
addition, the increase in broadband Internet penetration rates in Russia and around the world make IP-telephony services an attractive alternative to more expensive fixed-line
and mobile telecommunications services. Accordingly, the growing competition from operators providing

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IP-telephony
services may adversely affect our ability to increase or maintain our number of subscribers and could result in reduced operating margins, a loss of market share and a
reduction in revenues.



We have recently introduced or are developing new products and services, including (1) our Intelligent Network, which provides toll-free and
mass-calling inquiry services, (2) our Televoting service, which provides a mass-calling service for TV, radio and other press events involving high call volumes and
(3) VPN and Internet services based on our IP/MPLS network. If the markets for these services do not grow as expected, our ability to achieve further revenue growth may be impaired.
Furthermore, we may be unable to take advantage of any growth in demand for these services if we fail to develop and market our own services on a timely basis.



We bill end users at set tariffs for domestic and international long-distance telecommunications services and international operators for termination
of incoming traffic and other services. As with many other Russian companies, we have in the past experienced, and continue to experience, significant delays in payment from certain government-funded
entities and ministries, and some international operators. The incidence of delayed payments and bad debt may increase in the future as we are now required by law to provide services directly to end
users nationwide. Consequently, we may incur costs in covering the cash shortages that result from delayed settlements, including costs associated with borrowings and collections. Delays in payments
by our customers, as well as any significant level of bad debt, may have a material adverse effect on our business, financial conditions and results of operations.

Since
January 1, 2006, the method of charging and collecting from end users for DLD and ILD services has significantly changed. Pursuant to the SPAs entered into with IRCs, we
receive a large majority of our payments for the DLD and ILD services we provide within 50-55 days, but are required to settle payment with IRCs within 25-30 days
for their provision of intra-regional call origination and termination services. Therefore, in many cases, we are required to pay for the services provided by IRCs well before we receive payment for
the DLD/ILD services we provide to end users. There is a risk that we may not have sufficient cash resources available to settle with IRCs if they fail to collect payment from end users of our DLD/ILD
services in a timely and efficient manner. Accordingly, our obligation to pay IRCs before we receive payment could have a material adverse effect on our business, financial conditions and results
of operations.

Moreover,
following the introduction of the new regulatory scheme on January 1, 2006, we began providing DLD/ILD services to end users and bill them directly, which resulted in
changes to our customer base and led to an increase in our accounts receivable. The rate of collection of accounts receivable from end users under the new scheme is lower than that from IRCs and other
local operators under the scheme effective prior to January 1, 2006. Our inability to effectively collect payments from end users for services rendered may result in the growth of doubtful
accounts and, consequently, in losses from bad debt write-offs. Furthermore, the fees we pay to IRCs and other local operators for call origination and termination services represent a
substantial part of DLD/ILD services and do not depend on the collection of payments for DLD/ILD services we provide. Thus, lower collection rates may have a negative impact on our margins and, as a
result, materially adversely affect our financial position.

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The operation of our network depends upon our ability to obtain adequate supplies of switching and other network equipment, after-sales support and repair service
on a timely basis. At present, we purchase component parts for switching and certain network equipment from Cisco, NEC Corporation, Alcatel, Siemens AG, Huawei Technologies Co, Ltd. and
Ericsson. We also purchase and implement software products from suppliers including Microsoft, Oracle, IBM, Amdocs and PeterService. Our inability to obtain equipment, component parts, product and
repair support, software products and software updates as required from our current suppliers or alternative suppliers in a timely manner and at market prices could have a material adverse effect on
our business.



We are able to deliver services only to the extent that we can protect our network systems against damage from communications failures, computer viruses, power
failures, natural disasters, acts of terrorism and unauthorized access. Any system failure, accident or security breach that causes interruptions in our operations could impair our ability to provide
services to our subscribers and materially adversely affect our business and results of operations. In addition, to the extent that any disruption or security breach results in a loss of or damage to
subscribers' data or applications, or inappropriate disclosure of confidential information, we may incur liability as a result, including costs to remedy the damage caused by these disruptions or
security breaches.

Our
business also depends on our ability to successfully integrate new equipment and technologies into our network which, in turn, may lead to network overloads and failures. A material
failure of our network or a decline in network quality may harm our reputation, result in subscriber loss and materially adversely affect our business and results of operations.



Insufficient action by governmental authorities in ensuring compliance with applicable laws allows certain companies to infringe our rights in respect of DLD and
ILD traffic transit and termination of incoming traffic. The absence of government-imposed burdens on these companies may allow these companies to offer substantially lower tariffs than we do. This,
in turn, negatively impacts our revenues
by causing our market share to decrease and forcing us to reduce our tariffs in order to remain competitive, which we may not be able to do, if the respective tariffs are set up by the government. Our
inability to maintain our market share coupled with stringent tariff regulation may have a material adverse effect on our financial condition and results of operations.



Following a tax audit for the period covering the fiscal year ended December 31, 2003, the Russian tax authorities issued a tax assessment in June 2006 for
RUR 3.5 billion (including fines and penalties) relating to our calculation of taxes payable on our revenue from traffic transmission and certain VAT benefits. We filed a claim with the Moscow
Arbitration Court challenging this assessment, and in April 2007, the Moscow Arbitration Court ruled in our favor, reducing the assessment to RUR 1.3 million. The tax authorities appealed this
decision, and the appellate court further reduced the tax assessment to approximately RUR 0.15 million. We expect the Russian tax authorities to further appeal this

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decision.
In the event that we are ultimately found liable for all or a significant part of the original assessment, the resulting losses would have a material adverse impact on our financial
condition and results of operations.



We are dependent on our senior management for the implementation of our annual budget, achievement of strategic goals and operation of our
day-to-day activities. In addition, the professional experience of members of senior management is important to the conduct of our business. No assurance can be given that
management will continue to make their services available to us, and we are not insured against the detrimental effects to our business resulting from the loss or dismissal of key personnel.

We
are also dependent on certain qualified personnel for financial reporting in accordance with IFRS, U.S. GAAP and SEC requirements. In Russia, there are only a limited number of
individuals with adequate IFRS, U.S. GAAP and SEC reporting expertise and there is increasing demand and intense competition for such personnel as more Russian companies are beginning to
prepare financial
statements on the basis of IFRS or U.S. GAAP. Such competition makes it difficult for us to hire and retain such personnel, and currently we do not have sufficient qualified personnel to meet
our needs. This lack of qualified personnel resulted in a material weakness in our internal control over financial reporting identified by our management and our independent registered public
accounting firm. The loss of existing key personnel could have further material adverse effect on our business, financial condition and results of operations. For additional information, see
"Item 15. Controls and Procedures" and "We have identified and reported material weaknesses in our internal control over financial reporting and we may not be able to remediate
these material weaknesses or prevent future material weaknesses. If we fail to do so there is a reasonable possibility that a material misstatement of the annual or interim financial statements will
not be prevented or detected on a timely basis."



Over half of our employees are represented by the Telecommunications Union of Russia. Large union representation subjects our business to the risk of
interruptions through strikes, lockouts or delays in renegotiations of labor contracts. Our existing collective bargaining agreement also may not be renewed on terms favorable to us. In such events,
our business, financial condition and results of operations could be materially and adversely affected.



The insurance industry is not yet well developed in Russia, and many forms of insurance protection common in more economically developed countries are not yet
available in Russia on comparable terms, including coverage for business interruption. We maintain insurance against some, but not all, potential risks and losses that affect our operations, and we
cannot assure you that our insurance will be adequate to cover all of our losses or liabilities. We also cannot assure you that insurance will continue to be available to us on commercially reasonable
terms.

At
present, we have no coverage for business interruption or loss of key management personnel. In the event that a significant event were to affect one of our facilities or networks, we
could experience substantial property loss and significant disruptions in the provision of our services, for which we would not be compensated. Additionally, depending on the severity of the property
damage, we may not be able to rebuild damaged property in a timely manner or at all. We do not maintain separate funds or

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otherwise
set aside reserves for these types of events. Any such loss or third-party claim for damages may have a material adverse effect on our business, results of operations and financial
condition.



Members of our group, or their predecessors-in-interest, at different times took a variety of actions relating to share issuances, share
disposals and acquisitions, mandatory buy-out offers, valuation of property, interested party transactions, major transactions, meetings of the group members' governing bodies, other
corporate matters and anti-monopoly issues that, if successfully challenged on the basis of non-compliance with applicable legal requirements by competent state authorities,
counterparties in such transactions or shareholders of the relevant group members or their predecessors-in-interest, could result in the invalidation of such transactions and
our corporate decisions, restrictions on voting control or the imposition of other liabilities. Because applicable provisions of Russian law are subject to many different interpretations, we may not
be able to successfully defend any challenge brought against such transactions, and the invalidation of any such transactions or imposition of any such liability may, individually or in the aggregate,
have a material adverse effect on our business, financial condition and results of operations.



Under Russian law, the state has authority to regulate, to a certain extent, activities of natural monopolies. As we are considered to be a natural monopoly, we
are subject to regulation by the FST. In addition, as an entity controlling more than 35% of the DLD and ILD telecommunications market in Russia, we are also subject to regulation by the Federal
Anti-Monopoly Service, or the FAS.

The
Natural Monopolies Law provides a legal basis for the federal regulation of telecommunications providers and provides for state control over the setting of tariffs for
publicly-accessible telecommunications services, mail services and other activities. This law significantly impacts our ability to set tariffs independently. The Natural Monopolies Law and the Law on
Protection of Competition also govern the types of transactions into which a regulated entity, such as us, may enter. Any failure to comply with such regulation could materially and adversely affect
our business. The Russian government, through the FST, regulates end-user DLD tariffs and may require us to enter into specified contracts with state-owned entities. Although we are
permitted to petition the FST to change the tariffs based on such criteria as inflation and increased costs, such requests may not be granted and the FST may not adequately take such factors into
account in setting tariffs. In addition, as a regulated entity, we are not permitted to refuse to enter into contracts with particular consumers if the FAS so requires. Any of the above circumstances
could have a material adverse effect on our business, financial conditions and results of operations.



Our telecommunications licenses expire periodically and may be renewed upon application to Rossvyazokhrancultura. Government officials in Russia have broad
discretion in deciding whether to renew a license, and may not renew licenses after their expiration. If licenses are renewed, they may be renewed with additional obligations, including payment
obligations.

The
Communications Law also contains a broad list of grounds for the suspension and cancellation of licenses issued to communications operators. If we fail to comply with the
requirements of applicable

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Russian
legislation or fail to meet any terms of our licenses, our licenses and other authorizations necessary for our telecommunications operations may be suspended or terminated.

Failure
to renew our licenses or receive renewed licenses with similar terms to existing licenses could significantly limit our operations, which could have a material adverse effect on
our business and results of operations.

Additionally,
most of the telecommunications equipment used by us is subject to certification requirements. Failure to renew these certifications as necessary could result in our
inability to import and use such equipment, which could have a material adverse effect on our business and results of operations. See Note 28 to our consolidated financial statements for
additional information.



Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, our management is required to evaluate the effectiveness of our internal control over financial
reporting on an annual basis and furnish a report with management's assessment thereof as part of our Form 20-F filed with the SEC. Our management is also required to report on the
effectiveness of our disclosure controls and procedures. Our independent registered public accounting firm is required to attest to, and report on, management's assessment and the effectiveness of
internal control over financial reporting. As disclosed elsewhere in this report, management has identified thirteen material weaknesses in internal control over financial reporting and, accordingly,
has determined that internal control over financial reporting was not effective as of December 31, 2006. For more information, see "Item 15. Controls and Procedures."

We
believe that significant time, effort and expense, including time of senior management will continue to be required to design, maintain and evaluate the internal control system over
financial reporting under these rules. For these reasons, the costs involved in achieving Section 404 compliance could have a material adverse effect on our business, results of operation
and prospects.



Management has identified thirteen material weaknesses in our internal control over financial reporting as defined in the Accounting Standard No. 5 issued
by the Public Company Accounting Oversight Board for the year ended December 31, 2006. The material weaknesses in our internal control over financial reporting for the year ended
December 31, 2006 are described in "Item 15. Controls and Procedures."

Notwithstanding
the steps we have taken and continue to take that are designed to remediate these material weaknesses, we may not be successful in remediation of these material
weaknesses in the near or long term and we may not be able to prevent other material weaknesses in the future. For more information, see "Item 15. Controls and
ProceduresRemediation Activities and Changes in Internal Control Over Financial ReportingRemediation Activities." Any failure to maintain or implement required new or
improved internal control over financial reporting, or any difficulties we encounter in their implementation, could result in significant deficiencies or additional material weaknesses, cause us to
fail to meet our periodic reporting obligations or result in material misstatements in our financial statements.

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Any
such failure could also adversely affect the results of periodic management evaluations and annual auditor attestation reports with respect to the effectiveness of our internal
control over financial reporting as required by the SEC rules under Section 404 of the Sarbanes-Oxley Act of 2002. The existence of these material weaknesses could result in errors in our
financial statements that could result in a restatement of financial statements, cause us to fail to meet our reporting obligations, which could be subject to sanctions by regulatory authorities as
the SEC, and cause investors to lose confidence in our reported financial information, leading to a decline in the price of our shares and ADSs.

Risks Relating to Our Financial Condition



We have a substantial amount of outstanding indebtedness. As at December 31, 2006, our consolidated total debt was approximately $132 million, of
which $102 million was secured by the pledge of equipment. Our interest expense was approximately $5 million, net of amounts capitalized, as of December 31, 2006.

Our
ability to service, repay and refinance our indebtedness and to fund planned capital expenditures will depend on our ability to generate cash in the future. This, to a certain
extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control. In
addition, approximately $112 million of our debt is comprised of floating rate interest loans on which we may face interest rate increases. If we are unable to generate sufficient cash flow or
otherwise obtain funds necessary to make required payments, we may default under the terms of our indebtedness, and the holders of our indebtedness would be able accelerate the maturity of such
indebtedness, potentially causing cross-defaults under and acceleration of our other indebtedness.

In
addition, we may not be able to generate sufficient cash flow or access international capital markets or incur additional indebtedness to enable us to service or repay our
indebtedness or to fund our other liquidity needs. We may be required to refinance all or a portion of our indebtedness on or before maturity, sell assets, reduce or delay capital expenditures or seek
additional capital. Refinancing or additional financing may not be available on commercially reasonable terms or at all, and we may not be able to sell our assets or, if sold, the proceeds therefrom
may not be sufficient to meet our debt service obligations. Our inability to generate sufficient cash flow to satisfy our debt service obligations, or to refinance debt on commercially reasonable
terms, would materially adversely affect our business, financial condition, results of operations and prospects. See "Item 5. Operating and Financial Review and
ProspectsB.Liquidity and Capital Resources."



There are only a limited number of ruble-denominated instruments in which we may invest our excess cash. The devaluation of the U.S. dollar against the ruble
decreases our U.S. dollar-denominated holdings in ruble terms and results in foreign exchange losses as our financial statements are reported in rubles. We face similar risks in relation to our
Yen- and euro-denominated holdings.



The actual amount and timing of our future capital requirements may differ materially from our current estimates due to various factors, many of which are beyond
our control. Additional financing may be required in the event of departures from our current business plans and projections, including those caused by (i) unforeseen delays, (ii) cost
overruns, (iii) changes to engineering designs, (iv) demand for new services, (v) adverse regulatory, technological or competitive developments and/or

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(vi) major
changes in market conditions. Our capital requirements have and may continue to deviate materially from our estimates of such requirements.



A significant portion of our costs, expenditures and liabilities, as well as capital expenditures and borrowings, are either denominated in, or closely linked to,
the U.S. dollar and Special Drawing Rights, or SDRs, while most of our operating revenues are denominated in rubles. As a result, the devaluation of the ruble against the U.S. dollar or other
currencies comprising the SDR basket can adversely affect us by increasing our costs in ruble terms. Additionally, if the ruble declines against the U.S. dollar and increases in prices we charge for
our services do not offset such devaluation, we could have difficulty repaying or refinancing our U.S. dollar-denominated indebtedness. The devaluation of the ruble may also result in decrease in
purchasing capacity of our ruble-denominated assets, such as ruble deposits.



Although the inflation rate in Russia has been gradually decreasing in recent years (18.6% in 2001, 15.1% in 2002, 12.0% in 2003, 11.7% in 2004, 10.9% in 2005,
and 9.0% in 2006, according to Rosstat), it is still relatively high. We tend to experience inflation-driven increases in certain of our costs, including salaries, rents and energy costs, which are
sensitive to rises in the general price level in Russia. In this situation, due to competitive pressures and government regulation of our tariffs, we may not be able to raise the tariffs we charge for
our services sufficiently to preserve operating margins. Accordingly, high rates of inflation in Russia could increase our costs and decrease our operating margins.

Risks Relating to the Control of the Company by Svyazinvest and the Government of the Russian Federation



We are effectively controlled by Svyazinvest Telecommunications Investment Open Joint-Stock Company, or Svyazinvest, which holds 50.67% of our voting shares. In
turn, the government has a controlling interest in Svyazinvest. Mininformsvyaz has indicated its support for selling the government's stake in Svyazinvest, although it is not clear when or whether
such sale will occur. Any change in control in Svyazinvest may have a material adverse impact on our business activities due to the following factors:



Currently,
Svyazinvest is viewed as a strategic asset by the government mainly due to our vital role in providing telecommunications services to certain state agencies. The government
may therefore elect

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to
maintain a certain measure of control over Svyazinvest's subsidiaries, including us, through the maintenance of a "golden share" or other means.



The government, through the Federal Agency for Federal Property Management, holds a 75% stake less one share in Svyazinvest, and effectively controls Svyazinvest
and its group of companies, or the Svyazinvest Group. Svyazinvest holds 50.67% of our voting shares. Thus, we are effectively controlled by the government of the Russian Federation.

If
not otherwise required by law, resolutions at a shareholders' meeting will be adopted by a simple majority in a meeting at which shareholders holding more than half of the issued
share capital are present or represented. Accordingly, the Russian government has the power to control the outcome of most matters to be decided by vote at a shareholders' meeting and, as long as it
holds, directly or indirectly, the majority of our shares, will control appointment of the majority of directors and removal of directors. The government is also able to control or significantly
influence the outcome of any vote on, among other things, any proposed amendment to our charter, reorganization proposal, proposed substantial sale of assets or other major corporate transactions.
Thus, the government can take actions that may conflict with the interests of other holders of our ADSs.

Risks Relating to the Russian Federation



Investors in emerging markets such as the Russian Federation should be aware that these markets are subject to greater risks than more developed markets,
including in some cases significant legal, economic and political risks. In addition, market institutions and commercial practices are generally weaker and less developed in emerging markets than in
more developed countries. Investors should also note that emerging economies such as the economy of the Russian Federation are subject to rapid change and that the information set out herein may
become outdated relatively quickly. Accordingly, investors should exercise particular care in evaluating the risks involved and must decide for themselves whether, in light of those risks, their
investment is appropriate. Generally, investment in emerging markets is only suitable for sophisticated investors who fully appreciate the significance of the risks involved and investors are urged to
consult with their own legal and financial advisors before making an investment in our securities.



Russia's banking and other financial systems are less developed or regulated in comparison with other countries, and Russian legislation relating to banks and
bank accounts is subject to varying interpretations and inconsistent application. The August 1998 financial crisis resulted in the bankruptcy and liquidation of many Russian banks and almost entirely
eliminated the developing market for commercial bank loans at that time. Many Russian banks currently do not meet international banking standards, and the transparency of the Russian banking sector in
some respects still lags far behind internationally accepted norms. Aided by inadequate supervision by the regulators, certain banks do not follow existing Central Bank regulations with respect to
lending criteria, credit quality, loan loss reserves or diversification of exposure. Furthermore, in Russia, bank deposits made by corporate entities generally are not insured.

Recently,
there has been a rapid increase in lending by Russian banks, which many believe has been accompanied by a deterioration in the credit quality of the borrowers. In addition, a
robust

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domestic
corporate debt market is leading to Russian banks increasingly holding large amounts of Russian corporate ruble bonds in their portfolios, which is further deteriorating the risk profile of
Russian bank assets. The serious deficiencies in the Russian banking sector, combined with the deterioration in the credit portfolios of Russian banks, may result in the banking sector being more
susceptible to market downturns or economic slowdowns, including due to Russian corporate defaults that may occur during any such market downturn or economic slowdown. In addition, the Central Bank
has from time to time revoked the licenses of certain Russian banks, which resulted in market rumors about additional bank closures and many depositors withdrawing their savings. If a banking crisis
were to occur, Russian companies would be subject to severe liquidity constraints due to the limited supply of domestic savings and the withdrawal of foreign funding sources that would occur during
such a crisis.

There
is currently a limited number of sufficiently creditworthy Russian banks. We hold the bulk of our excess ruble and foreign currency cash in Russian banks, including subsidiaries of
foreign banks, in part, because we are required to do so by Central Bank regulations and because the ruble is not transferable or convertible outside of Russia. Another banking crisis or the
bankruptcy or insolvency of the banks from which we receive or with which we hold our funds could result in the loss of our deposits or affect our ability to complete banking transactions in Russia,
which could have a material adverse effect on our business, financial condition and results of operations.

Political and Social Risks



Since 1991, Russia has sought to transform from a one-party state with a centrally-planned economy to a democracy with a market economy. As a result
of the sweeping nature of the reforms, and the failure of some of them, the Russian political system remains vulnerable to popular dissatisfaction, including dissatisfaction with the results of
privatizations in the 1990s, as well as to demands for autonomy from particular regional and ethnic groups.

Current
and future changes in the government, major policy shifts or lack of consensus between various branches of the government and powerful economic groups could disrupt or reverse
economic and regulatory reforms. In addition, the Russian presidential elections scheduled for 2008 could bring more volatility to the market. Any disruption or reversal of reform policies could lead
to political or governmental instability or the occurrence of conflicts among powerful economic groups, which could have a material adverse effect on our business, financial condition, results of
operations and prospects and the value of our shares and ADSs.



The Russian Federation is a federation of 85 sub-federal political units, consisting of republics, territories, regions, cities of federal importance
and autonomous regions and districts. The delineation of authority and jurisdiction among the members of the Russian Federation and the federal government is, in many instances, unclear and remains
contested. Lack of consensus between the federal government and local or regional authorities could result in the enactment of conflicting legislation at various levels and may lead to political
instability. In particular, conflicting laws have been enacted in the areas of privatization, land legislation and licensing. Some of these laws and governmental and administrative decisions
implementing them, as well as certain transactions consummated pursuant to them, have in the past been challenged in the courts, and such challenges may occur in the future. This lack of consensus may
hinder our long-term planning efforts and create uncertainties in our operating environment, both of which may prevent us from effectively and efficiently implementing our business
strategy.

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Additionally, ethnic, religious, historical and other divisions have, on occasion, given rise to tensions and, in certain cases, military conflict, which can halt normal economic
activity and disrupt the economies of neighboring regions. For example, violence and attacks relating to the Chechen conflict have spread to other parts of Russia and several terrorist attacks have
been carried out by Chechen terrorists in other parts of Russia, including in Moscow. The further intensification of violence, including terrorist attacks and suicide bombings, or its spread to other
parts of Russia, could have significant political consequences, including the imposition of a state of emergency in some or all of Russia. Moreover, any terrorist attacks and the resulting heightened
security measures are likely to cause disruptions to domestic commerce and exports from Russia. These factors could materially adversely affect our business and the value of our shares
and ADSs.



The political and economic changes in Russia in recent years have resulted in significant dislocations of authority. The local and international press have
reported that significant organized criminal activity has arisen, particularly in large metropolitan centers. Property crime in large cities has increased substantially. In addition, the local and
international press have reported high levels of corruption, including the bribing of officials for the purpose of initiating investigations by government agencies. Press reports have also described
instances in which government officials engaged in selective investigations and prosecutions to further the commercial interests of certain government officials or certain companies or individuals.
Additionally, some members of the Russian media regularly publish disparaging articles in return for payment. The depredations of organized or other crime, demands of corrupt officials or claims that
we have been involved in official corruption could result in negative publicity, disrupt our ability to conduct our business and could thus materially adversely affect our business, financial
condition, results of operations and prospects.



The failure of the government and many private enterprises to pay full salaries on a regular basis and the failure of salaries and benefits generally to keep pace
with the rapidly increasing cost of living have led in the past, and could lead in the future, to labor and social unrest. Labor and social unrest may have political, social and economic consequences,
such as increased support for a renewal of centralized authority; increased nationalism, including restrictions on foreign involvement in the economy of
Russia; and increased violence. An occurrence of any of the foregoing events could restrict our operations and lead to the loss of revenues, materially adversely affecting our operations.



Governmental authorities in Russia have a high degree of discretion and, at times, act selectively or arbitrarily, without hearing or prior notice, and sometimes
in a manner that is inconsistent with legislation or influenced by political or commercial considerations. Selective or arbitrary governmental actions have reportedly included the denial or withdrawal
of licenses, sudden and unexpected tax audits and claims, criminal prosecutions and civil actions. Federal and local government entities have also used ordinary defects in matters surrounding share
issuances and registration as pretexts for court claims and other demands to invalidate such issuances and registrations or to void transactions. Moreover, the government also has the power in certain
circumstances, by regulation or government act, to interfere with the performance of, nullify or terminate contracts. Standard & Poor's has expressed concerns that "Russian companies and their
investors can be subjected to government pressure through selective implementation of regulations and legislation that is either politically motivated or triggered by competing business groups." In
this environment, our competitors may

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receive
preferential treatment from the government, potentially giving them a competitive advantage over us.

In
addition, recently, the Russian tax authorities have aggressively brought tax evasion claims relating to Russian companies' use of tax-optimization schemes, and press
reports have speculated that these enforcement actions have been selective and politically motivated. Selective or arbitrary government action, if directed at us, could have a material adverse effect
on our business, financial condition, results of operations and prospects.

Economic Risks



Since the dissolution of the Soviet Union in the early 1990s, the Russian economy has experienced at various times:



Although
Russia has benefited recently from the increase in global commodity prices, providing an increase in disposable income and an increase in consumer spending, the Russian economy
has been subject to abrupt downturns in the past. In particular, on August 17, 1998, in the face of a rapidly deteriorating economic situation, the Russian government defaulted on its
ruble-denominated securities, the Central Bank stopped its support of the ruble and a temporary moratorium was imposed on certain foreign currency payments. These actions resulted in an immediate and
severe devaluation of the ruble and a sharp increase in the rate of inflation; a substantial decline in the prices of Russian debt and equity securities; and an inability of Russian issuers to raise
funds in the international capital markets.

These
problems were aggravated by a major banking crisis in the Russian banking sector after the events of August 17, 1998, as evidenced by the termination of the banking licenses
of a number of major Russian banks. This further impaired the ability of the banking sector to act as a consistent source of liquidity to Russian companies and resulted in the losses of bank deposits
in some cases.

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Recently,
the Russian economy has experienced positive trends, such as the increase in the gross domestic product, a relatively stable ruble, strong domestic demand, rising real wages
and a reduced rate of inflation; however, these trends may not continue or may be abruptly reversed.



The Russian economy is vulnerable to market downturns and economic slowdowns elsewhere in the world. As has happened in the past, financial problems or an
increase in the perceived risks associated with investing in emerging economies could dampen foreign investment in Russia and businesses could face severe liquidity constraints, further materially
adversely affecting the Russian economy. Additionally, because Russia produces and exports large amounts of oil, the Russian economy is especially vulnerable to the price of oil on the world market
and a decline in the price of oil could slow or disrupt the Russian economy or undermine the value of the ruble against foreign currencies. Recent military conflicts and international terrorist
activity have also significantly impacted oil and gas prices, and pose additional risks to the Russian economy. Russia is also a major producer and exporter of metal products and its economy is
vulnerable to fluctuations in world commodity prices and the imposition of tariffs and/or antidumping measures by certain export markets. A market downturn and/or economic slowdown in the Russian
economy could materially adversely affect our business and the value of our shares and ADSs.



The infrastructure in Russia largely dates back to Soviet times and has not been adequately funded and maintained over the past decade. Particularly affected are
the rail and road networks; power generation and transmission systems; communication systems and building stock. For instance, in May 2005, a fire and explosion in one of the Moscow power substations
built in 1963 caused a major power outage in a large section of Moscow and some surrounding regions. The blackout disrupted the ground electric transport, including the metro system, led to road
traffic accidents and massive traffic congestion, disrupted electricity and water supply in office and residential buildings and affected mobile communications. The trading on exchanges and the
operation of many banks, stores and markets were also halted. The poor condition of the physical infrastructure in Russia adds costs to doing business and can result in disruptions in our business
operations.

In
addition, any efforts undertaken by the Russian government to modernize the country's infrastructure may result in increased tariffs for the use of such infrastructure and thereby
increase our costs and adversely affect our financial results and results of operations.

Legal Risks and Uncertainties



We, our principal shareholders, their affiliates and our subsidiaries in the past have carried out, and continue to carry out, transactions with us and others
which may be considered to be "interested party transactions" under Russian law, requiring approval by disinterested directors, disinterested independent directors or disinterested shareholders. See
"Item 10. Additional InformationDescription of Charter Capital and Certain Requirements of Russian LegislationInterested Party Transactions." The provisions of Russian
law defining which transactions must be approved as "interested party transactions" are subject to different interpretations. We cannot assure you that our and our subsidiaries' applications of these
concepts will not be subject to challenge by former and current shareholders. Any such challenges, if successful, could result in the invalidation of transactions, which

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could
have a material adverse effect on our business, financial condition, results of operations and prospects.

In
addition, Russian law requires a three quarters majority vote of the holders of voting stock present at a shareholders' meeting to approve certain transactions and other matters,
including, for example, charter amendments, major transactions involving assets in excess of 50% of the assets of the company, repurchase by the company of shares and certain share issuances. In some
cases, minority shareholders may not approve interested party transactions requiring their approval or other matters requiring approval of minority shareholders or supermajority approval. In the event
that these minority shareholders were to successfully challenge past interested party transactions, or do not approve interested party transactions or other matters in the future, we could be limited
in our operational flexibility and our business, financial condition and results of operations could be materially adversely affected.



Russia is still developing the legal framework required to support a market economy. The following risk factors relating to the Russian legal system create
uncertainty with respect to the legal and business decisions that we make, many of which uncertainties do not exist in countries with more developed market economies:



The
nature of much of Russian legislation, the lack of consensus about the scope, content and pace of economic and political reform and the rapid evolution of the Russian legal system in
ways that may not always coincide with market developments place the enforceability and underlying constitutionality of laws in doubt and results in ambiguities, inconsistencies and anomalies. In
addition, Russian legislation often contemplates implementing regulations which have not yet been promulgated, leaving substantial gaps in the regulatory infrastructure. All of these weaknesses could
affect our ability to enforce our rights under our licenses and contracts, or to defend ourselves against claims by others. We cannot assure you that regulators, judicial authorities or third parties
will not challenge our compliance with applicable laws, decrees and regulations.

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Our operations and properties are subject to regulation by various government entities and agencies in connection with obtaining and renewing various licenses,
approvals, authorizations and permits, as well as with ongoing compliance with existing laws, regulations and standards. Regulatory authorities exercise considerable discretion in matters of
enforcement and interpretation of applicable laws, regulations and standards, the issuance and renewal of licenses, approvals, authorizations and permits and in monitoring licensees' compliance with
the terms thereof. Russian authorities have the right to, and frequently do, conduct periodic inspections of our operations and properties throughout the year. Any such future inspections may conclude
that we or any of our subsidiaries have violated laws, decrees or regulations, and we may be unable to refute such conclusions or remedy the violations.

Our
failure to comply with existing laws and regulations or to obtain all approvals, authorizations and permits required to operate telecommunications equipment or the findings of
government inspections may also result in the imposition of fines or penalties or more severe sanctions including the suspension, amendment or termination of our licenses, approvals, authorizations
and permits, or in requirements that we cease certain of our business activities, or in criminal and administrative penalties applicable to our officers. Any such decisions, requirements or sanctions,
or any increase in governmental regulation of our operations, could increase our costs and materially adversely affect our business, financial condition and results of operations.



The regulation and supervision of the securities market, financial intermediaries and issuers are considerably less developed in Russia than, for example, in the
United States or the European Union. Many Russian securities regulations have only recently been adopted. In addition, the Russian securities market is regulated by several different authorities which
are often in competition with each other. These include:



The
regulations of these various authorities are not always coordinated and may be contradictory.

In
addition, Russian corporate and securities rules and regulations can change rapidly, which may materially adversely affect our ability to conduct securities-related transactions.
While some important areas are subject to virtually no oversight, the regulatory requirements imposed on Russian issuers in other areas result in delays in conducting securities offerings and in
accessing the capital markets. It is often unclear whether or how regulations, decisions and letters issued by the various regulatory authorities apply to us. The FSFM has recently introduced a number
of regulations relating to offerings of shares in and outside of Russia, including combined offerings involving closed subscription for new shares and the sale of existing shares, which remain largely
untested and subject to varying interpretations. Any challenges of such regulations or transactions consummated pursuant to them could have an adverse effect on our ability to effect equity offerings
in the future. As a result, we may

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be
subject to fines and/or other enforcement measures despite our best efforts at compliance, which could have a material adverse effect on our business, financial condition and results
of operations.



The independence of the judicial system and its immunity from economic, political and nationalistic influences in Russia remains largely untested. The court
system is understaffed and underfunded. Judges and courts are generally inexperienced in the area of business and corporate law. Judicial precedents generally have no binding effect on subsequent
decisions. Not all Russian legislation and court decisions are readily available to the public or organized in a manner that facilitates understanding. The Russian judicial system can be slow or
unjustifiably swift. Enforcement of court orders can, in practice, be very difficult in Russia. Additionally, court claims are often used in furtherance of political and commercial aims or infighting.
We may be subject to such claims and may not be able to receive a fair hearing. Additionally, court orders are not always enforced or followed by law enforcement agencies, and the government may
attempt to invalidate court decisions by backdating or retroactively applying relevant legislative changes. Judicial decisions in Russia can be unpredictable and may not provide effective redress.

These
uncertainties also extend to property rights. During Russia's transformation from a centrally planned economy to a market economy, legislation has been enacted to protect private
property against expropriation and nationalization. However, it is possible that due to the lack of experience in enforcing these provisions and due to political factors, these protections would not
be enforced in the event of an attempted expropriation or nationalization. Expropriation or nationalization of any of our entities, their assets or portions thereof, potentially without adequate
compensation, would have a material adverse effect on our business.



Ownership of Russian joint stock company shares (or, if the shares are held through a nominee or custodian, the holdings of such nominee or custodian) is
determined by entries in a share register and is evidenced by extracts from that register. Currently, there is no central registration system in Russia. Share registers are maintained by the companies
themselves or, if a company has more than 50 shareholders or so elects, by licensed registrars. Regulations have been issued regarding the licensing conditions for such registrars, as well as
the procedures to be followed by both companies maintaining their own registers and licensed registrars when performing the functions of registrar. In practice, however, these regulations have not
been strictly enforced, and registrars generally have relatively low levels of capitalization and inadequate insurance coverage. Moreover, registrars are not necessarily subject to effective
governmental supervision. Due to the lack of a central and rigorously regulated share registration system in Russia, transactions in respect of a company's shares could be improperly or inaccurately
recorded, and share registration could be lost through fraud, negligence, official and unofficial governmental actions or oversight by registrars incapable of compensating shareholders for their
misconduct. This creates risks of loss not normally associated with investments in other securities markets.

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Generally, taxes payable by Russian companies are substantial and numerous. These taxes include, among others:



The
tax environment in Russia historically has been complicated by the fact that various authorities have often issued contradictory tax legislation. This uncertainty potentially exposes
us to significant fines and penalties and enforcement measures despite our best efforts at compliance, and could result in a greater than expected tax burden and the suspension or termination of
our licenses.

Recently,
there have been significant changes to the Russian taxation system. Global tax reforms commenced in 1999 with the introduction of Part One of the Tax Code of the Russian
Federation, or the Tax Code, which sets general taxation guidelines. Since then, Russia has been in the process of replacing legislation regulating the application of major taxes such as corporate
income tax, VAT and property tax with new chapters of the Tax Code.

In
practice, the Russian tax authorities generally interpret the tax laws in ways that rarely favor taxpayers, who often have to resort to court proceedings to defend their position
against the tax authorities. Recent events within the Russian Federation suggest that the tax authorities may be taking a more assertive position in their interpretations of the legislation and
assessments. Differing interpretations of tax regulations exist both among and within government ministries and organizations at the federal, regional and local levels, creating uncertainties and
inconsistent enforcement. Tax declarations, together with related documentation such as customs declarations, are subject to review and investigation by a number of authorities, each of which may
impose fines, penalties and interest charges. Generally, in an audit, taxpayers are subject to inspection with respect to the three calendar years which immediately preceded the year in which the
audit is carried out. Previous audits do not completely exclude subsequent claims relating to the audited period because Russian tax law authorizes upper-level tax inspectorates to review the results
of previous tax audits conducted by subordinate tax inspectorates. In addition, on July 14, 2005, the Russian Constitutional Court issued a decision that allows the statute of limitations for
tax liabilities to be extended beyond the three-year term set forth in the tax laws if a court determines that a taxpayer has obstructed or hindered a tax audit. Because none of the
relevant terms is defined, tax authorities may have broad discretion to argue that a taxpayer has "obstructed" or "hindered" an audit and ultimately seek penalties beyond the three-year
term. In some instances, new tax regulations have been given retroactive effect.

Moreover,
financial results of Russian companies cannot be consolidated for tax purposes. Therefore, each of our Russian subsidiaries pays its own Russian taxes and may not offset its
profit or loss against the loss or profit of any of our other subsidiaries. In addition, intercompany dividends are subject to a withholding tax of 9%, if being distributed to Russian companies, and
15%, if being distributed to foreign companies. If the receiving company itself pays a dividend, it may offset tax withheld against its own withholding liability of the onward dividend although not
against any withholding made on a
distribution to a foreign company. These tax requirements impose additional burdens and costs on our operations, including management resources.

The
foregoing conditions create tax risks in Russia that are more significant than typically found in countries with more developed tax systems, imposing additional burdens and costs on
our operations, including management resources. In addition to our substantial tax burden, these risks and uncertainties

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complicate
our tax planning and related business decisions, potentially exposing us to significant fines and penalties and enforcement measures despite our best efforts at compliance, and could
materially adversely affect our business, financial condition, results of operations and prospects and the value of our shares and ADSs.



In the past, Russian currency regulations imposed various restrictions on operations involving foreign currencies in an attempt to support the ruble. Effective
from January 1, 2007, most of these restrictions have been removed. However, the government and the Central Bank may impose requirements on cash inflows and outflows into and out of Russia or
on the use of foreign currency in Russia in the future. For example, Russian companies currently must repatriate proceeds from export sales. Moreover, the foreign currency market in Russia is still
developing, and we may experience difficulty in converting rubles into other currencies. A majority of our major capital expenditures and payments to vendors and substantially all of our debt are
denominated and payable in various foreign currencies, including the U.S. dollar and euro. Any delay or difficulty in converting rubles into a foreign currency to make a payment or any practical
difficulty in the transfer of foreign currency could limit our ability to meet our payment and debt obligations, which could result in the acceleration of debt obligations and cross-defaults, or
prevent us from carrying on necessary business transactions, including paying our foreign suppliers.



The Civil Code of the Russian Federation and the Federal Law on Joint Stock Companies of December 26, 1995, or the Joint Stock Companies Law, generally
provide that shareholders in a Russian joint stock company are not liable for the obligations of the joint stock company and bear only the risk
of loss of their investment. This may not be the case, however, when one company is capable of determining decisions made by another company. The company capable of determining such decisions is
deemed an "effective parent." The company whose decisions are capable of being so determined is deemed an "effective subsidiary." Under the Joint Stock Companies Law, an effective parent bears joint
and several responsibility for transactions concluded by the effective subsidiary in carrying out these decisions if:



In
addition, an effective parent is secondarily liable for an effective subsidiary's debts if an effective subsidiary becomes insolvent or bankrupt resulting from the action or inaction
of an effective parent. This is the case no matter how the effective parent's ability to determine decisions of the effective subsidiary arises. For example, this liability could arise through
ownership of voting securities or by contract. In these instances, other shareholders of the effective subsidiary may claim compensation for the effective subsidiary's losses from the effective parent
which caused the effective subsidiary to take action or fail to take action knowing that such action or failure to take action would result in losses. Accordingly, we could be liable in some cases for
the debts of our subsidiaries. The total liability of our subsidiaries, as of December 31, 2006, was $128 million. This liability could have a material adverse effect on our business,
results of operations and financial condition.

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Russian law provides that shareholders that vote against or abstain from voting on certain matters have the right to sell their shares to the company at market
value in accordance with Russian law. The decisions that trigger this right to sell shares include:



Our
(or, as the case may be, our subsidiaries') obligation to purchase shares in these circumstances, which is limited to 10% of the company's net assets calculated in accordance with
RAS at the time the matter at issue is voted upon, could have a material adverse effect on our results of operations and financial condition.



For two consecutive years in 2004 and 2005, we were unable to approve amendments to our charter. In accordance with the Joint Stock Companies Law, charter
amendments must be adopted by a three-fourths majority of shareholders taking part in a general shareholders' meeting.

In
accordance with Russian legislation, our depositary bank, JPMorgan Chase Bank, is treated as the beneficial holder of the ordinary shares underlying the ADSs. Our custodian bank, ING
Bank (Eurasia), serving as a nominal holder for our depositary bank after receiving voting instructions from the depositary bank, is registered at our general shareholders' meeting as the nominal
holder of the ordinary shares underlying the ADSs, which comprised approximately 25% of our total outstanding ordinary shares in 2004 and 2005. However, historically, holders of only 3-5%
of our ordinary shares represented by ADSs exercise their voting rights at our general shareholders' meetings. As a result, approximately 20% of total shares eligible to be voted at our annual
shareholders' meeting in 2004 and 2005 were not voted, which made it very difficult to reach the 75% threshold required to approve the amendments to our charter.

While
we were able to approve amendments to our charter in 2006 and 2007, the lack of court or regulatory guidance regarding such matters may hinder our ability to amend our charter in
the future. Furthermore, our inability to amend our charter limits our flexibility in introducing changes to our corporate governance practices required by new regulations, listing rules and
supervising authorities, and may have a material adverse effect on our business, financial condition and results of operations.



Russian transfer pricing rules effective since 1999 give Russian tax authorities the right to control prices for transactions between related entities and certain
other types of transactions between independent parties, such as foreign trade transactions or transactions with significant price fluctuations. The Russian transfer pricing rules are vaguely drafted,
and are subject to interpretation by Russian tax authorities and courts, and have been used for politically motivated investigations and prosecutions. Although we believe that we comply with Russian
tax law on transfer pricing, the uncertainties in interpretation of transfer pricing legislation may result in the tax authorities challenging

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our
prices and making adjustments which could affect our tax position. If such price adjustments become effective by a court order or otherwise, our results of operations could be materially adversely
affected. In addition, we could face significant losses associated with the assessed amount of underpaid prior tax and related interest and penalties.

In
addition, a number of draft amendments to the transfer pricing law have recently been introduced which, if implemented, would considerably toughen the existing law. The proposed
changes would, among other things, shift the burden of proving market prices from the tax authorities to the taxpayer, cancel the existing permitted deviation threshold and introduce specific
documentation requirements for proving market prices.

Risks Relating to the Shares and ADSs and the Trading Market



Minority shareholder protection under Russian law principally derives from supermajority shareholder approval requirements for certain corporate actions, as well
as from the ability of a shareholder to demand that the company purchase the shares held by that shareholder if that shareholder voted
against or did not participate in voting on certain types of actions. Companies are also required by Russian law to obtain the approval of disinterested shareholders for certain transactions with
interested parties. In practice, enforcement of these protections has been poor. Shareholders of some companies have also suffered as a result of fraudulent bankruptcies initiated by hostile
creditors.

The
supermajority shareholder approval requirement is met by a vote of 75% of all voting shares that are present at a shareholders' meeting. Thus, controlling shareholders owning
slightly less than 75% of outstanding shares of a company may have a 75% or more voting power if certain minority shareholders are not present at the meeting. In situations where controlling
shareholders effectively have 75% or more of the voting power at a shareholders' meeting, they are in a position to approve amendments to the charter of the company or significant transactions
including asset transfers, which could be prejudicial to the interests of minority shareholders. It is possible that our majority shareholders and our management in the future may not run us and our
subsidiaries for the benefit of minority shareholders, and this could have a material adverse effect on the value of the shares and ADSs.

While
the Joint Stock Companies Law provides that shareholders owning not less than 1% of the company's stock may bring an action for damages on behalf of the company, Russian courts to
date do not have much experience with such lawsuits. Russian law does not contemplate class action litigation. Accordingly, your ability to pursue legal redress against us may be limited, reducing the
protections available to you as a holder of the shares and ADSs.



Many jurisdictions, such as the United Kingdom and the United States, recognize a distinction between legal owners of securities, such as the depositary, and the
beneficial owners of securities, such as the ADS holders. In these jurisdictions, the shares held by the depositary on behalf of the ADS holders would not be subject to seizure in connection with
legal proceedings against the depositary that are unconnected with the shares.

Russian
law may not, however, recognize a distinction between legal and beneficial ownership of securities. Russian law generally treats a depositary as the owner of shares underlying
the ADSs and, accordingly, may not recognize ADS holders' beneficial ownership therein.

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Thus, in proceedings brought against a depositary, whether or not related to shares underlying the ADSs, Russian courts may treat those underlying shares as the assets of the depositary,
open to seizure or arrest. In the past, a lawsuit was filed against a depositary other than the depositary seeking the seizure of various Russian companies' shares represented by ADSs issued by that
depositary. In the event that this type of suit were to be successful in the future against the depositary, and the shares underlying our ADSs were to be seized or arrested, the ADS holders involved
would lose their rights to such underlying shares and all of the money invested in them.



Our privatization began in 1992 and continued through 1997. To the extent that privatization legislation is vague, inconsistent or in conflict with other
legislation, including conflicts between federal and local privatization legislation, many privatizations are vulnerable to challenge, including selective challenges. For instance, a series of
presidential decrees issued in 1991 and 1992 that granted to the Moscow City Government the right to adopt its own privatization procedures were subsequently held to be invalid by the Constitutional
Court of the Russian Federation, which ruled, in part, that the presidential decrees addressed issues that were the subject of federal law. While this court ruling, in theory, did not require any
implementing actions, the presidential decrees were not officially annulled by another presidential decree until 2000. Currently, there are no pending challenges to our privatization. In the event
that our privatization is subject to challenge as having been improper and shareholders are unable to defeat such claims, our shareholders and the holders of the ADSs may lose their investment.



ADS holders will have no direct voting rights with respect to the shares represented by the ADSs. They will be able to exercise voting rights with respect to the
shares represented by ADSs only in accordance with the provisions of the deposit agreement relating to the ADSs and relevant requirements of Russian law. Therefore, there are practical limitations
upon the ability of ADS holders to exercise their voting rights due to the additional procedural steps involved in communicating with them. For example, the Joint Stock Companies Law and our charter
require us to notify shareholders no less than 30 days prior to the date of any meeting and at least 70 days prior to the date of an extraordinary meeting to elect our Board of Directors
and to pass upon certain matters. Our shareholders will receive notice
directly from us and will be able to exercise their voting rights by either attending the meeting in person or voting by power of attorney.

ADS
holders by comparison, will not receive notice directly from us. Rather, in accordance with the deposit agreement, we will provide the notice to the depositary. The depositary has
undertaken, in turn, as soon as practicable thereafter, to mail to you the notice of such meeting, voting instruction forms and a statement as to the manner in which instructions may be given by ADS
holders. To exercise their voting rights, ADS holders must then instruct the depositary how to vote the shares represented by the ADSs they hold. Because of this additional procedural step involving
the depositary, the process for exercising voting rights may take longer for ADS holders than for holders of the shares and we cannot assure ADS holders that they will receive voting materials in time
to enable them to return voting instructions to the depositary in a timely manner. ADSs for which the depositary does not receive timely voting instructions will not be voted.

In
addition, although Russian securities regulations expressly permit the depositary to split the votes with respect to the shares underlying the ADSs in accordance with instructions
from ADS holders, there is little court or regulatory guidance on the application of such regulations, and the depositary may choose to refrain from voting at all unless it receives instructions from
all ADS holders

29

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to
vote the shares in the same manner. ADS holders may thus have significant difficulty in exercising voting rights with respect to the shares underlying the ADSs. We cannot assure you that holders
and beneficial owners of ADSs will (i) receive notice of shareholder meetings to enable the timely return of voting instructions to the depositary, (ii) receive notice to enable the
timely cancellation of ADSs in respect of shareholder actions or (iii) be given the benefit of dissenting or minority shareholders' rights in respect of an event or action in which the holder
or beneficial owner has voted against, abstained from voting or not given voting instructions.



Our presence outside the United States may limit your legal recourse against us. We are incorporated under the laws of the Russian Federation. All of our
directors and executive officers reside outside the United States, principally in the Russian Federation. All or a substantial portion of our assets and the assets of our officers and directors are
located outside the United States. As a result, you may not be able to effect service of process within the United States upon us or our officers and directors. Similarly, you may not be able to
obtain or enforce U.S. court judgments against us, our officers and directors, including actions under the civil liability provisions of U.S. securities laws. In addition, it may be difficult for you
to enforce, in original actions brought in courts in jurisdictions outside the United States, liabilities predicated upon U.S. securities laws.

There
is no treaty between the United States and the Russian Federation providing for reciprocal recognition and enforcement of foreign court judgments in civil and commercial matters.
These limitations may deprive you of effective legal recourse for claims related to your investment in the ADSs. The deposit agreement provides for actions brought by any party thereto against us to
be settled by arbitration in accordance with the rules of the London Court of International Arbitration. The Russian Federation is a party to the United Nations (New York) Convention on the
Recognition and Enforcement of Foreign Arbitral Awards, but it may be difficult to enforce arbitral awards in the Russian Federation due to a number of factors, including the inexperience of Russian
courts in international commercial transactions, official and unofficial political resistance to enforcement of awards against Russian companies in favor of foreign investors and Russian courts'
inability to enforce such orders and corruption.



Our corporate governance is regulated by Russian laws and by the charters and by-laws of companies comprising the group, as well as by recommendations
outlined in the corporate conduct code issued by the Russian securities regulator. The rights of shareholders and the responsibilities of members of the Board of Directors and the Management Board
under Russian law are different from, and may be subject to certain requirements not generally applicable to, corporations organized in the United States or other jurisdictions. Although we are
subject to the reporting requirements of the U.S. Exchange Act, the periodic disclosure required of non-U.S. companies under the U.S. Exchange Act is more limited than the
disclosure required of U.S. companies. Therefore, there may be less publicly available information about us than is regularly published by or about other public companies in the United States.



We anticipate that any dividends we may pay in the future on the shares represented by the ADSs will be declared and paid to the depositary in rubles and will be
converted into U.S. dollars by the depositary and distributed to holders of ADSs, net of the depositary's fees and expenses. The ability to convert rubles into U.S. dollars is subject to the
availability of U.S. dollars in Russia's currency markets. Although there is an existing, albeit limited, market within Russia for the conversion of rubles into

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U.S. dollars,
including the interbank currency exchange and over-the-counter and currency futures markets, the further development of this market is uncertain. At
present, there is no market for the conversion of rubles into foreign currencies outside of Russia and no liquid market in which to hedge ruble and ruble-denominated investments.



The liquidity of a securities market is often a function of the volume of the underlying shares that are publicly held by unrelated parties. Although our ADS
holders are entitled to withdraw the shares underlying the ADSs from the depositary at any time, there is a limited public market for our shares. This, in turn, may affect the liquidity of our ADSs
and their trading price. The trading prices of the shares and ADSs may also be subject to wide fluctuations in response to many factors, including:



In
addition, Russian law prohibits Russian companies from issuing and trading more than 35% of their shares outside of Russia, including issuing shares that would serve as a basis for
derivative securities, such as ADSs. This restriction may also limit the liquidity of our ADSs and their trading price.



Under the Joint Stock Companies Law, existing shareholders of a joint stock company enjoy preemptive rights to subscribe and pay for a proportionate number of
shares to maintain their existing ownership percentages prior to the issuance of any new equity shares. Holders of ADSs may be unable to exercise preemptive rights for equity shares underlying the
ADSs unless a registration statement under the U.S. Securities Act is effective with respect to such rights or an exemption from the registration requirements under the U.S. Securities
Act is available. We are not obligated to prepare or file such a registration statement and our decision to do so would depend on the costs and potential liabilities associated with any such
registration statement, as well as the perceived benefits of allowing ADS holders to exercise their preemptive rights, and any other factors we consider at that time. No assurance can be given that we
will file a registration statement under these circumstances. If we issue any such securities in the future, such securities may be issued to the depositary, which may sell the securities for
the benefit of the ADS holders. There can be no assurances as to the value the depositary would receive, if any, upon the sale of such securities. To the extent that the ADS holders are unable to
exercise preemptive rights granted in respect of equity securities represented by their ADSs, their proportional interest in us will be reduced.



Under Russian law, dividends paid to a non-resident holder of the shares generally will be subject to Russian withholding tax at a rate of 15% for
legal entities and organizations and at a rate of 30%

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for
individuals. The domestic tax rate applicable to dividends payable by Russian companies to non-resident individuals will be reduced from 30% to 15% effective from January 1,
2008. This tax may be reduced to 5% or 10% for legal entities and organizations and to 10% for individuals under the Convention between the United States of America and the Russian Federation for the
Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income and Capital (the "United States-Russia income tax treaty") for U.S. tax residents. However, the
Russian tax rules applicable to ADS holders are characterized by significant uncertainties. In 2005 and 2006, the Ministry of Finance of the Russian Federation expressed an opinion that ADS holders
(rather than the depositary) should be treated as the beneficial owners of the underlying shares for the purposes of double tax treaty provisions applicable to taxation of dividend income from the
underlying shares, provided that the tax residencies of the ADS holders are duly confirmed. However, in the absence of any specific provisions in the Russian tax legislation with respect to the
concept of beneficial ownership and taxation of income of beneficial owners, it is unclear how the Russian tax authorities and courts will ultimately treat the ADS holders in this regard. Thus, we may
be obliged to withhold tax at standard rates when paying out dividends, and U.S. ADS holders may be unable to benefit from the United States-Russia income tax treaty. See "Item 10.
Additional InformationE. TaxationRussian Income and Withholding Tax Consequences" for additional information.



Under Russian tax law, gains arising from a sale, exchange or other disposition by non-resident holders that are legal entities or organizations of
Russian securities, such as the shares, as well as financial instruments derived from such securities, such as the ADSs, may be subject to Russian profits tax to be withheld at source by the Russian
payor of the income.

However,
no procedural mechanism currently exists to withhold and remit this tax with respect to sales made to persons other than Russian companies and foreign companies with a
registered presence in Russia. Gains arising from a sale, exchange or other disposition of the foregoing types of securities on foreign stock exchanges by non-resident holders that are
legal entities are, as a practical matter, not subject to taxation in Russia. Therefore, as long as the ADSs remain listed on a foreign
stock exchange, gains arising from a sale, exchange or other disposition on that foreign stock exchange of the ADSs by non-resident legal entities or organizations to other
non-resident legal entities or organizations should not be subject to taxation in Russia.

Capital
gains derived by individual non-resident holders from their disposition of Russian shares or securities, such as the shares or ADSs, will be considered Russian-source
income, and generally will be subject to Russian tax withheld at source if the disposition is made through or to a professional dealer or broker that is a Russian legal entity or a foreign company
with a permanent establishment in Russia.

Other Risks



We have sourced certain information contained in this document from third parties, including private companies and Russian government agencies, and we have relied
on the accuracy of this information without independent verification. The official data published by Russian federal, regional and local governments may be substantially less complete or researched
than those of Western countries. Official statistics may also be produced on different bases than those used in Western countries. Any discussion of matters relating to Russia in this document are
therefore subject to uncertainty due to concerns about the completeness or reliability of available official and public information. In addition, the veracity of some official data released by the
Russian government may be questionable. In 1998, the Director of the Russian State Committee on Statistics and a number of his

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subordinates
were arrested and subsequently sentenced by a court in 2004 in connection with their misuse of economic data.

Item 4.    Information on the Company

A.    History and Development

General Information

Open Joint Stock Company Long-Distance and International Telecommunications Rostelecom was organized as an open joint stock company under the laws of
the Russian Federation on September 23, 1993. Our registered address changed in 2006, and is currently located at 15, Dostoevskogo Street, St. Petersburg, 191002, Russia. Our principal
executive offices are located at 14, 1st Tverskaya-Yamskaya St., Moscow 125047, Russia. Our telephone number is +7 499 972 8283, our facsimile number is
+7 499 972 8222 and our e-mail address is rostelecom@rostelecom.ru. We maintain a website at http://www.rt.ru/. The information on our website is not
a part of this annual report.

Our
charter capital is currently comprised of 728,696,320 ordinary shares, par value 0.0025 rubles per share, and 242,831,469 preferred shares, par value 0.0025 rubles per share.

In
accordance with the Registration Statement on Form F-6 under the U.S. Securities Act relating to the registration of our ADSs, we appointed Puglisi &
Associates, 850 Library Avenue, Suite 204, Newark, Delaware 19715, as our authorized representative in the United States in connection with the ADSs.

We
have appointed CT Corporation System, 111 Eighth Avenue, New York, New York 10011, as our authorized agent for service of process for any suit or
proceeding arising out of or relating to our shares, ADSs, or the Deposit Agreement.

Listing of Our Shares

Our American Depositary Receipts, or ADRs, have been listed on the New York Stock Exchange (ticker ROS) since February 17, 1998. Our common and preferred
shares (tickers RTKM and RTKMP, respectively) have been listed on the RTS Stock Exchange, or the RTS, and the MICEX Stock Exchange, or the MICEX, since October 27, 1997 and February 27,
1997, respectively.

Investment Policy Highlights

The main objective of our investment program is to further develop and modernize our integrated digital telecommunications network in order to strengthen our
position in Russia's long-distance telecommunications market, as well as other segments of the telecommunications market.

The
investment program focuses on the following major areas:



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Capital Expenditures

To achieve our strategic objectives, in the mid-1990s we began the construction of a modern telecommunications infrastructure and expansion of our
primary network and implemented new technologies which enabled us to enlarge the scope of services we provided to various customers. We financed these investments through internal sources, including
cash from operations, as well as through external debt financing.



In 2004, we invested approximately RUR 4,502 million in our property, plant and equipment. The most significant investment projects implemented in
2004 were as follows:



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In 2005, we invested approximately RUR 7,788 million in our property, plant and equipment. The most significant investment projects implemented in
2005 were as follows:





In 2006, we invested approximately RUR 7,177 million in our property, plant and equipment. The most significant investment projects implemented in
2006 were as follows:



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We plan to invest approximately RUR 9,238 million and approximately RUR 9,363 million annually for projects in 2007 and 2008,
respectively, using cash from operations and external financing sources. The investment program for 2007 and subsequent years includes the following major projects:



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Acquisitions

We made the following material acquisitions during 2006 and 2007 (as of the date of this annual report):

In
April 2006, we acquired a 74.58% stake in CJSC Globus-Telecom from CJSC Sinterra (formerly CJSC Alsean-N) and OJSC RTC-Leasing for a cash payment of
approximately RUR 821 million.

In
April 2006, we also acquired a 100% stake in LLC TelecomCenter, which directly controls a 20.34% stake in CJSC Globus-Telecom, from LLC AVTEX for a cash payment of
approximately RUR 280.5 million. As a result, we currently own directly and indirectly a 94.92% stake in CJSC Globus-Telecom.

In
May 2006, we increased our stake in CJSC Insurance Company Costars from 60% to 86.67% following our acquisition of shares placed by CJSC Insurance Company Costars in a
private offering for a cash payment of RUR 20 million.

In
June 2006, we acquired a 99.99% stake in CJSC Zebra-Telecom from Starford Investments Company, Ltd. for a total cash payment of approximately U.S.$13.5 million.

In
March 2007, we acquired through Westelcom, our 100% subsidiary, a 25.99% stake in OJSC InfoTeX Taganrog Telecom from LLC InfoTeX Telecom for a total cash payment of
approximately RUR 24 million. As a result, we currently indirectly own a 99.99% stake in OJSC InfoTeX Taganrog Telecom.

For
a description of the acquired companies, see "C. Organizational StructureConsolidated Subsidiaries."

Divestitures

We made the following material divestitures during 2006:

In
February 2006, we sold our 10% interest in CJSC Telecross to CJSC Crosna-Invest for a cash payment of RUR 1.8 million.

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In
March 2006, we sold our 17% interest in LLC Artelecom-Service to LLC Artelecom-Service for a cash payment of RUR 9.25 million.

In
March 2006, we sold our 90% interest in LLC RTC-Sibir to LLC Telemir for a cash payment of RUR 0.6 million.

In
May 2006, we sold through Westelcom, our 100% subsidiary, our 77% interest in OJSC A-Svyaz to OJSC Dalsvyaz for a cash payment of RUR 10 million.

In
May 2006, we sold our 99.9% interest in LLC Informtech to LLC Credo Experto Jure for a cash payment of approximately RUR 8 million.

In
May 2006, we sold our 30% interest in "Tele and Radio Broadcasting Company Yalta" to LLC Credo Experto Jure for a cash payment of approximately RUR 19 million.

In
December 2006, we sold our 0.28% interest in CJSC Promsvyazbank to LLC Twenty Second Century for a cash payment of approximately RUR 34 million.

As
of the date of this annual report, we did not make any material divestitures during 2007.

B.    Business Overview

Overview

We are a major nationwide telecommunications services provider and carrier of DLD and ILD traffic in the Russian Federation. We own and operate a nationwide trunk
telecommunications network and carry the bulk of Russia's long-distance and international traffic. Throughout the country, we render domestic and international long-distance
telecommunications services to end users and provide traffic throughput services to Russian operators, including each of Russia's seven IRCs and alternative operators. In addition, we provide
telecommunications services to various government entities across Russia and ensure the operation of the ground-based network of most television and radio broadcasting channels.

Prior
to January 1, 2006, we were the only nationwide carrier of wholesale long-distance and international traffic in Russia and, therefore, held a monopoly position
in this market. Local operators, including IRCs, billed their own local customers for outgoing domestic long-distance and international calls, while we billed the operators for the traffic
throughput. Our arrangement in Moscow was different, as we provided domestic long-distance and international telecommunications services directly to end users through the local access
network of a local operator and billed customers directly. We also had the exclusive right to terminate incoming international voice traffic from international operators.

Reform
of the Russian telecommunications industry began with the introduction of the new Communications Law in 2004 and has intensified as implementing regulations have been enacted
thereunder. Most significantly, the new regulations opened up the DLD/ILD market by allowing telecommunications operators to apply for DLD/ILD telecommunications services licenses, and radically
restructured our relationships with IRCs, local operators and subscribers.

In
particular, the new regulations that came into effect on January 1, 2006 require (i) operators of DLD and ILD telephone networks to provide long-distance
services directly to end users and bill these customers for such services; (ii) IRCs to provide DLD/ILD operators with intra-regional call origination and termination services and
(iii) local telephone network operators to provide IRCs with local call origination and termination services. Thus, under this new structure, we provide services to and bill end users, IRCs
provide services to and bill us, and local operators provide services to and bill IRCs, with settlements between operators conducted in the order of the services rendered. Subscriber billing and
collection activities, as well as other customer service functions, are to be performed by the DLD/ILD operator or its agents.

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We
have entered into service contracts with the IRCs and other operators of local and intra-regional networks to act as our regional agents. In this capacity, our agents bill end users,
prepare, print and deliver invoices and collect payments from end users and perform customer service functions. See Note 3 to our consolidated financial statements for additional
information.

Our
trunk network, which transmits a majority of Russia's domestic and international long-distance traffic, is comprised of nearly 145,000 kilometers of digital and analog
lines. As of December 31, 2006, our digitalization level in terms of channel kilometers was 97% of our total network, and 100% of our switching equipment was digitalized. We have completed a
major part of the construction of our domestic long-distance digital transit network based on eight ASNs. Today, 100% of our ATEs, which are stations that collect voice traffic and
automatically sort and retransmit it to our ASNs and ISCs, are connected with our ASNs and ISCs through two or more paths. For additional information, see "Switches" and "The
Telecommunications Industry in RussiaCurrent Structure of the Russian Telecommunications Industry" below.

We
have completed the construction of a fully connected international digital network based on 14 ISCs and ITEs, ensuring the availability of international telecommunications
services throughout most of Russia. We have direct access to 68 countries and participate in 25 international cable systems. We also maintain relationships with more than 400 international operators
and network administrations.

Russia
is a member of the International Telecommunications Union, or ITU, a specialized intergovernmental group organized under the United Nations which facilitates guidelines and
agreements regulating telecommunications. The ITU is designed to coordinate, standardize and internationally regulate the telecommunications industry worldwide. We also seek to strengthen our
relations with international operators with whom we have direct channels through written arrangements.

We
have implemented and continue to develop a variety of services to complement our international and domestic long-distance communications services. We also offer multimedia
communications services, digital channels for lease and distribute television and radio programs through our network throughout Russia.

Our
principal business activities are the provision of DLD/ILD and leased line services. Our revenues were comprised the following for the years ended December 31, 2004,
2005, 2006:

|                  |  | % of total revenues
|----------------- |  | -------------------
|
|Telephone traffic |  | 81.5               
|Rent of channels  |  | 12.4               
|Other revenue     |  | 6.1                

See Note 21 to our consolidated financial statements for additional information regarding our revenues relating to each principal
business activity.

Business Strategy

As we were the fixed-line DLD/ILD service provider monopoly in Russia until 2006, and continue to hold a dominant position in the Russian DLD/ILD
telecommunications services market, the liberalization reform in 2006 and related restructuring of the DLD/ILD market has had and will continue to have a significant impact on our business. However,
as certain gaps remain in the new legislative framework, it is still unclear in some respects how the new regulatory regime will ultimately impact our business, financial condition and results of
operations. We therefore regularly review and refine our business strategy as circumstances change.

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See
"Item 3. Key InformationD. Risk FactorsRisks Relating to the Regulatory Reform of the Russian Telecommunications IndustryImplementation
of the new Federal Law on Communications, or the Communications Law, may cause us to lose our dominant position in the Russian long-distance telecommunications market, may impact our
ability to timely and accurately prepare our financial statements and impose additional financial burdens on us, which may materially and adversely affect our business, financial condition and results
of operations" for a description of the regulatory reform of the DLD/ILD telecommunications services market and the uncertainties regarding how the liberalization program will impact our business,
financial condition and results of operations.

For
2007, our main objectives and main target markets are broader than they have been in previous years. These objectives and markets are summarized below:

Our global goals in the Russian telecommunications market are to:



Our goals in the corporate client market are to:



Our goals in the market for end users of DLD and ILD services are to:



Our goals in the Russian operators market are to:



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Our goals in the international market are to:



Seasonality

The demand for our services is generally stable, without any marked seasonal fluctuations. Notable fluctuations in demand for telecommunications services occur
only on particular dates, such as public holidays and nationwide events.

Network and Facilities

We provide DLD/ILD telecommunications services through ground and submarine cables, digital radio-relay lines and satellites. Our digital network based on
Synchronous Digital Hierarchy, a European
standard used for long-distance data transmission, and DWDM technologies covers almost the entire network territory of the Russian Federation.

Primary Communications Network

Our primary network consists of trunk cables linked to the IRCs' networks and to our ISCs for connections with foreign operators, as well as a satellite
communications network. As of December 31, 2006, our digital network comprised 45,077 kilometers, including 30,388 kilometers of FOLs and 14,689 kilometers of digital radio-relay lines.
A fundamental component of the network is high-capacity FOLs between Moscow and Novorossiysk, Moscow and St. Petersburg, and Moscow and Khabarovsk, as well as a satellite
communications network that includes three junction centers in Moscow, Novosibirsk and Khabarovsk, and nine periphery switches in Barnaul, Kirov, Gorno-Altaysk, Kyzyl, Minusinsk, Yakutsk,
Novokuznetsk, Yuzhno-Sakhalinsk and Salekhard.

We
have installed international FOLs accessing Finland, Denmark, Turkey, Italy, Bulgaria, Japan, Korea, China, Estonia, Kazakhstan, Ukraine, Georgia and Belarus. Major foreign operators
can now send their unswitched traffic through Russia. As new digital communication lines are built, we regularly phase-out our analog transmission lines. Thus, nearly 60,000 kilometers of
analog lines have been phased-out during 2001 through 2006.

The
following table describes the principal lines of communication that comprised our primary network as of December 31, 2006:

|Line                                                                                             |  | Type of line      |  | Length
(km) |     | Transmission
rate
(Mbits/sec) |  | Channels
|------------------------------------------------------------------------------------------------ |  | ----------------- |  | ----------- | --- | ----------------------------- |  | --------
|Aksay to Lugansk                                                                                 |  | Fiber Optic Cable |  | 36          | (2) | 622                           |  | 7,56    
|Apastovo to Kazan                                                                                |  | Fiber Optic Cable |  | 132         |     | 622                           |  | 7,56    
|Apastovo to Malaya Purga, with branches to Kazan, Naberezhnyie Chelny, Izhevsk and Yoshkar-Ola   |  | Fiber Optic Cable |  | 661         |     | 2,488                         |  | 30,24   
|Apastovo to Shigony                                                                              |  | Fiber Optic Cable |  | 220         |     | 622                           |  | 7,56    
|Baltic Cable System                                                                              |  | Fiber Optic Cable |  | 1,28        |     | 6 × 2,488 +
4 × 2,488         |  | 302,4   
|Budennovsk to Kizlyar to Makhachkala with branches to Cherkessk, Nalchik, Nazran and Vladikavkaz |  | Fiber Optic Cable |  | 901         |     | 2,488                         |  | 30,24   
|Chelyabinks to Tyumen                                                                            |  | Fiber Optic Cable |  | 536         |     | 9,953                         |  | 120,96  
|                                                                                                 |  |                   |  |             |     |                               |  |         

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|Gatikha to Apastovo                                                                                                      |  | Fiber Optic Cable           |  | 924   |     | 9,953             |  | 120,96
|------------------------------------------------------------------------------------------------------------------------ |  | --------------------------- |  | ----- | --- | ----------------- |  | ------
|Issad to Petrozavodsk                                                                                                    |  | Fiber Optic Cable           |  | 319   |     | 2,488             |  | 30,24 
|Ivanovka to Vladivostok                                                                                                  |  | Fiber Optic Cable           |  | 61    |     | 622               |  | 7,56  
|Kaliningrad to Gvardeisk to Sovetsk                                                                                      |  | Fiber Optic Cable           |  | 131   | (2) | 2,488             |  | 30,24 
|Kaluga to Belgorod up to Ukrainian border, with branches to Bryansk, Kursk and Belgorod                                  |  | Fiber Optic Cable           |  | 974   | (2) | 2,488             |  | 30,24 
|Khabarovsk to Harbin                                                                                                     |  | Fiber Optic Cable           |  | 150   | (2) | 2,488             |  | 30,24 
|Khabarovsk to Vladivostok                                                                                                |  | Fiber Optic Cable           |  | 840   |     | 9,953             |  | 120,96
|Kingisepp to Albertslund                                                                                                 |  | Submarine Fiber Optic Cable |  | 1,274 | (1) | 2 × 565           |  | 15,12 
|Kingisepp to Kotka (Finland)                                                                                             |  | Fiber Optic Cable           |  | 234   |     | 9,953             |  | 120,96
|Kingisepp to St. Petersburg                                                                                              |  | Suspended Fiber Optic       |  | 191   |     | 2 × 622           |  | 15,12 
|Kingisepp to Tallinn                                                                                                     |  | Fiber Optic Cable           |  | 26    | (2) | 2,488             |  | 30,24 
|Kirov to Syktyvkar                                                                                                       |  | Fiber Optic Cable           |  | 390   |     | 3 × 155           |  | 5,67  
|Kizlyar to Grozny                                                                                                        |  | Fiber Optic Cable           |  | 140   |     | 155               |  | 1,89  
|Krasnodar to Novorozhdestvenskaya                                                                                        |  | Fiber Optic Cable           |  | 149   |     | 9,952             |  | 120,96
|Lyuban to Issad                                                                                                          |  | Fiber Optic Cable           |  | 140   |     | 2,488             |  | 30,24 
|Moscow Ring                                                                                                              |  | Fiber Optic Cable           |  | 64    |     | 9,952             |  | 120,96
|Moscow to Khabarovsk                                                                                                     |  | Digital Radio-Relay         |  | 7,992 |     | 6 × 155           |  | 11,34 
|Moscow to Minsk, with branch to Smolensk                                                                                 |  | Fiber Optic Cable           |  | 480   | (2) | 9,953             |  | 120,96
|Moscow to Novorossiysk                                                                                                   |  | Fiber Optic Cable           |  | 1,653 |     | 2,488 +
2 × 9,953 |  | 272,16
|Moscow to Samara                                                                                                         |  | Fiber Optic Cable           |  | 1,021 |     | 4 × 9,953         |  | 483,84
|Moscow to St. Petersburg                                                                                                 |  | Fiber Optic Cable           |  | 1,163 |     | 3 × 9,952         |  | 362,88
|Moscow to Yekaterinburg                                                                                                  |  | Fiber Optic Cable           |  | 2,4   |     | 2,488             |  | 30,24 
|Nakhodka to Khabarovsk                                                                                                   |  | Fiber Optic Cable           |  | 897   |     | 2 × 622           |  | 15,12 
|Nakhodka to Naoetsu to Pusan                                                                                             |  | Submarine Fiber Optic Cable |  | 1,762 | (1) | 565               |  | 15,36 
|Nazran to Grozny                                                                                                         |  | Fiber Optic Cable           |  | 55    |     | 9,953             |  | 120,96
|Novorossiysk to Istanbul to Palermo to Karolina Bugas                                                                    |  | Submarine Fiber Optic Cable |  | 3,564 | (1) | 565               |  | 15,12 
|Novorossiysk to Sochi to Poti                                                                                            |  | Submarine Fiber Optic Cable |  | 425   |     | 2,488             |  | 30,24 
|Novorossiysk to Varna to Karolina Bugas                                                                                  |  | Submarine Fiber Optic Cable |  | 1,225 | (1) | 2,488             |  | 30,24 
|Novorozhdestvenskaya to Stavropol to Kropotkin to Pyatigorsk to Budennovsk with branches to Mineralnyie Vody, Kislovodsk |  | Fiber Optic Cable           |  | 458   |     | 2,488             |  | 30,24 
|Novorozhdestvenskaya to Stavropol to Makhachkala                                                                         |  | Fiber Optic Cable           |  | 270   |     | 2,488             |  | 30,24 
|Novosibirsk to Khabarovsk                                                                                                |  | Fiber Optic Cable           |  | 5,48  |     | 2 × 9,953         |  | 241,92
|Overlay digital network in Moscow Region                                                                                 |  | Fiber Optic Cable           |  | 709   |     | 2 × 622           |  | 15,12 
|Perm to Ekaterinburg                                                                                                     |  | Digital Radio-Relay         |  | 565   |     | 2 × 155           |  | 3,78  
|Perm to Ekaterinburg                                                                                                     |  | Fiber Optic Cable           |  | 382   |     | 2 × 9,953         |  | 241,92
|Perm to Izhevsk                                                                                                          |  | Fiber Optic Cable           |  | 657   |     | 2,488             |  | 30,24 
|Russia to Azerbaijan                                                                                                     |  | Fiber Optic Cable           |  | 201   | (2) | 622               |  | 7,56  
|Russia to China (Belogorsk to Blagoveshchensk to Heihe)                                                                  |  | Fiber Optic Cable           |  | 21    |     | 2,488             |  | 30,24 
|Russia to Kazakhstan (Eastern segment of border)                                                                         |  | Fiber Optic Cable           |  | 220   | (2) | 622               |  | 7,56  
|Russia to Kazakhstan (Western segment)                                                                                   |  | Fiber Optic Cable           |  | 455   | (2) | 2,488             |  | 30,24 
|Samara to Novosibirsk                                                                                                    |  | Fiber Optic Cable           |  | 2,782 |     | 2 × 9,952         |  | 241,92
|Samara to Orenburg                                                                                                       |  | Digital Radio-Relay         |  | 386   |     | 155               |  | 1,89  
|                                                                                                                         |  |                             |  |       |     |                   |  |       

42

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|Samara to Saratov to Volgograd                                        |  | Fiber Optic Cable   |  | 928       |     | 2 × 2,488 |  | 60,48 
|--------------------------------------------------------------------- |  | ------------------- |  | --------- | --- | --------- |  | ------
|Skovorodino to Tynda to Yakutsk                                       |  | Fiber Optic Cable   |  | 167 + 867 |     | 2,488     |  | 30,24 
|St. Petersburg to Finland                                             |  | Fiber Optic Cable   |  | 197       | (2) | 622       |  | 7,56  
|St. Petersburg to Kingisepp to Moscow                                 |  | Digital Radio-Relay |  | 923       |     | 3 × 140   |  | 5,76  
|St. Petersburg to Lyuban to Luga                                      |  | Fiber Optic Cable   |  | 289       |     | 2,488     |  | 30,24 
|Tula to Kaluga                                                        |  | Fiber Optic Cable   |  | 212       |     | 2,488     |  | 30,24 
|Tyumen to Omsk                                                        |  | Fiber Optic Cable   |  | 660       |     | 9,953     |  | 120,96
|Tyumen to Surgut                                                      |  | Fiber Optic Cable   |  | 930       |     | 2,488     |  | 30,24 
|Tyumen to Surgut                                                      |  | Digital Radio-Relay |  | 709       |     | 2 × 155   |  | 9,45  
|Ufa to Orenburg                                                       |  | Fiber Optic Cable   |  | 824       |     | 9,953     |  | 120,96
|Vladimir to Vologda, with branches to Ivanovo, Kostroma and Yaroslavl |  | Fiber Optic Cable   |  | 665       |     | 622       |  | 7,56  
|Volgograd to Elista to Budennovsk                                     |  | Fiber Optic Cable   |  | 560       |     | 2,488     |  | 30,24 
|Volgograd to Rostov-on-Don                                            |  | Fiber Optic Cable   |  | 516       |     | 2,488     |  | 30,24 
|Yoshkar-Ola to Kirov                                                  |  | Fiber Optic Cable   |  | 465       |     | 2,488     |  | 30,24 
|Zadonsk to Lipetsk to Tambov                                          |  | Fiber Optic Cable   |  | 270       |     | 622       |  | 7,56  

---

Switches

As of December 31, 2006, we owned 14 ISCs and ITEs, which allow for efficient ILD traffic management, including five in Moscow, two in
St. Petersburg (Lyuban) and one each in Rostov-on-Don, Samara, Ekaterinburg, Novosibirsk, Khabarovsk, Kaliningrad and Murmansk. The combined capacity of these switches
was 185,500 channels. In addition, we had eight ASNs, which allow for efficient DLD traffic management and which are interconnected by digital channels, and six ATEs that provide access to DLD service
to local users, including five in Moscow and one in Pavlov Posad. The ASNs and their connecting digital channels constitute an integrated services digital network, or ISDN, with channel switches to
which the networks of IRCs and alternative operators are connected. The ATEs of Moscow and Pavlov Posad route domestic long-distance traffic between switching centers, as well as directly
to and from end users.

As
of December 31, 2006, our domestic long-distance trunk network consisted of 593,000 digital and 4,000 analog channels. Approximately 95.7% of all digital channels
are connected through the SS-7. All Russian ATEs have access to our digital transit network.

Of
the Russian ATEs, 77 are able to provide ISDN services through the domestic long-distance network. We have an open network of multimedia communications. Connected to this
network are subscriber units in 75 Russian regions and 13 retail outlets.

Submarine Cables

As part of our program to expand and upgrade our international telecommunications capabilities, we utilize modern submarine cables to establish traffic links
between Russia and other countries. We are
the terminal party and a major capacity owner in five international fiber optic cable systems: Denmark-Russia 1, Russia-Japan-Korea, Italy-Turkey-Ukraine-Russia, Novorossiysk-Varna-Odessa, and
Novorossiysk-Sochi-Poti (Russia-Georgia). Our ownership stakes in these cable systems range from 9% to 67%. The remainder is controlled by various international operators.

In
addition, in order to provide access to these systems and to establish direct high-quality international lines to remote sites of the world, we participate in the
construction of, and acquire

43

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capacity
in, international cable systems. As of the date of this annual report, we have interests in, or an indefeasible right of use of, 25 cable systems, including global cable systems projects such
as Fiber Line Around the Globe (UK-Middle East-Japan), Asia-Pacific Cable, Canada-Transatlantic system, Trans-Pacific Cable (Japan-USA), South East
Asia-Middle East-Western Europe system and Trans-Atlantic system.

Satellite Communications

Our main satellite communications network is operated by three nodal land-based stations and nine periphery land-based stations located in
Russia. To enable its operation, we lease satellite capacity from the government-owned company FSUE Space Communications and its affiliates, which operate earth satellite vehicles Express-AM3 and
Express A2. We also operate a second satellite communications network, Reserv, which is comprised of one central and one periphery land-based station. To enable its operation, we lease
channels from OJSC Gazcom, which operates earth satellite vehicle Yamal-200. The composition and the locations of the land-based satellite communications stations were
determined by us based on the secondary network requirements for, among other things, access to the trunk network through ASNs and trunk digital communications.

We
also rent domestic and international fixed satellite channels from FSUE Space Communications, CJSC SatComLine, CJSC SvyazContactInform, OJSC YamalTelecom and CJSC Zond Holding,
which are Russian satellite telecommunications companies that operate satellites in the FSUE Space Communications and Intelsat systems.

Cooperation with Mobile Communications Network Operators

Our cooperation with Russian operators of land-based mobile communications networks is aimed at expanding our high-quality network
services, including the establishment of national and international roaming.

As
of December 31, 2006, we provided international roaming for the major national and regional mobile communications operators, connecting them with 521 international mobile
operators in 187 countries.

In
order to broaden the spectrum of our communications services and to upgrade communications with Russia's remote regions, we, in partnership with GlobalStar, launched the Russian
segment of the GlobalStar Global System for Mobile Satellite Communications in order to provide mobile satellite communications services throughout Russia. To facilitate this project, we and
GlobalStar in 1996 established CJSC GlobalTel, a U.S.-Russian joint venture. We believe that the pooling of GlobalStar's modern global mobile satellite communications facilities with the
capacity of our domestic long-distance trunk network creates additional opportunities for establishing national and international roaming and for selling communications services to Russian
users. The Russian segment of the GlobalStar system has been in commercial operation since the end of 2000.

Services



We are the primary provider of international telecommunications services in Russia. Specifically, we provide the switching and transmission infrastructure that
connects the Russian domestic telecommunications trunk network with foreign networks and, in coordination with foreign telecommunications operators, facilitate the transmission of global
telecommunications traffic within Russia. According to our estimates, at the end of 2006 our market share in the international sector was as follows (measured by traffic minutes):



44

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In
2006, our volume of outgoing ILD traffic amounted to 1,933 million minutes (including 1,101 million minutes from end users and 832 million minutes from Russian
operators), an increase of 9.2% from the previous year. The increase was primarily due to our strengthening partnership with Russian operators, and focus on new market opportunities to provide
telecommunications services directly to end users.

In
2006, our volume of incoming ILD and transit traffic from international operators amounted to 2,461 million minutes, an increase of 31.3% from the previous year.

In
2006, ILD revenue increased by 31.4% to RUR 17,751 million, or 29% of our revenues, compared to RUR 13,503 million, or 33% of our revenues in 2005 and to
RUR 13,101 million, or 35% of our revenues in 2004.

For
additional information, see "Item 5. Operating and Financial Review and ProspectsA. Operating Results."

The
following tables set forth data on our incoming and outgoing international traffic for 2004, 2005 and 2006.

International traffic with foreign countries, excluding traffic to and from CIS countries and
the Baltic States (in millions, except percentages)

|                                                  |  | 2004  |  | 2005  |  | 2006  
|------------------------------------------------- |  | ----- |  | ----- |  | ------
|Outgoing traffic (minutes)                        |  | 379   |  | 582   |  | 472   
|Outgoing traffic growth (% per annum)             |  | 22.6% |  | 53.6% |  | -18.9%
|Incoming and transit traffic (minutes)            |  | 1,005 |  | 1,230 |  | 1,531 
|Incoming and transit traffic growth (% per annum) |  | 34.0% |  | 24.5% |  | 24.5% 
|Total traffic (minutes)                           |  | 1,384 |  | 1,812 |  | 2,003 

International traffic with the Baltic States (in millions, except percentages)

|                                       |  | 2004  |  | 2005  |  | 2006  
|-------------------------------------- |  | ----- |  | ----- |  | ------
|Outgoing traffic (minutes)             |  | 45    |  | 55    |  | 40    
|Outgoing traffic growth (% per annum)  |  | 15%   |  | 22.2% |  | -27.1%
|Incoming and transit traffic (minutes) |  | 42    |  | 48    |  | 115   
|Incoming traffic growth (% per annum)  |  | 16.9% |  | 14.3% |  | 139.6%
|Total traffic (minutes)                |  | 87    |  | 103   |  | 155   

International traffic with CIS countries (in millions, except percentages)

|                                       |  | 2004  |  | 2005  |  | 2006 
|-------------------------------------- |  | ----- |  | ----- |  | -----
|Outgoing traffic (minutes)             |  | 1,117 |  | 1,132 |  | 1,420
|Outgoing traffic growth (% per annum)  |  | 16.1% |  | 1.3%  |  | 25.4%
|Incoming and transit traffic (minutes) |  | 547   |  | 597   |  | 814  
|Incoming traffic growth (% per annum)  |  | 7.9%  |  | 9%    |  | 37.3%
|Total traffic (minutes)                |  | 1,664 |  | 1,725 |  | 2,234

Our largest international traffic routes are between Russia and Germany, the United States, the United Kingdom, France, Italy and Finland. The
following table sets forth the total number of billed minutes of international incoming and outgoing calls for these countries for 2004, 2005 and 2006.

45

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Minutes of international incoming and outgoing calls (in millions)

|Country                  |  | 2004 |  | 2005 |  | 2006
|------------------------ |  | ---- |  | ---- |  | ----
|United States of America |  | 201  |  | 357  |  | 483 
|Germany                  |  | 164  |  | 194  |  | 286 
|United Kingdom           |  | 127  |  | 192  |  | 335 
|France                   |  | 34   |  | 31   |  | 43  
|Italy                    |  | 45   |  | 29   |  | 36  
|Finland                  |  | 82   |  | 109  |  | 42  

In 2006, approximately 55% of all outgoing international traffic was initiated from Moscow and St. Petersburg, respectively. Accordingly,
the traffic volume and the tariff rates for alternative operators for outgoing international calls in these two cities have a material impact on our results of operations.



We establish the tariffs for outgoing international calls based on the destination of the call and the day and the time of the call.

Prior
to January 1, 2006 (except for Moscow subscribers), for each outgoing call from IRCs, we received 50% of the total amount that the relevant IRC charged to subscribers
initiating the call. Since January 1, 2006, we have been providing DLD/ILD services directly to end users in Russia using IRCs and other local and intra-regional operators as our agents
for billing and payment collection services, among other things. Under the new settlement system, we receive 100% of the payments collected by our agents from end users and, in return for their
services, we pay them a commission. The commission amount depends on the volume of traffic minutes and the particular agent's success in collecting payments. In general, the commission amounts vary
from 14% to 18% of our revenues from DLD/ILD services. In addition, we pay IRCs and other operators for call origination and termination services provided to us.

Since
April 1, 2004, we have been using the following two types of tariffs for international calls:



The
tables below illustrate the international tariffs effective as of December 31, 2006. All tariffs include VAT, except for organizations in Moscow, where the tariffs
exclude VAT.

46

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Tariffs for international telephone communications with CIS countries, Baltic States and 
other foreign countries

|REGION                                                                |             | Per minute tariff (rubles)
|--------------------------------------------------------------------- | ----------- | --------------------------
|
|
|
|CIS countries:                                                        |             |                           
|Belarus, Ukraine                                                      |             | 7.00                      
|Azerbaijan, Armenia, Georgia                                          |             | 16.00                     
|Moldova, Kazakhstan, Kyrgyzstan, Tajikistan, Turkmenistan, Uzbekistan |             | 8.00                      
|Baltic states:                                                        |             |                           
|Latvia, Lithuania, Estonia                                            |             | 13.00                     
|Other Foreign countries:                                              |             |                           
|Europe                                                                |             |                           
|                                                                      | Tariff 1    |                           
|                                                                      | Tariff 2*   |                           
|Asia and Middle East                                                  |             |                           
|                                                                      | Tariff 1    |                           
|                                                                      | Tariff 2**  |                           
|Vietnam                                                               |             | 15.00                     
|Turkey                                                                |             | 10.00                     
|Americas                                                              |             |                           
|                                                                      | Tariff 1    |                           
|                                                                      | Tariff 2*** |                           
|Australia, Oceania                                                    |             | 23.60                     
|Africa                                                                |             | 28.20                     
|Satellite telecommunications network of Thuraya                       |             | 30.51                     
|East Timor                                                            |             | 38.98                     
|Palau                                                                 |             | 33.90                     

---

Notes:

47

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|REGION                                                                |              | Moscow region |       | St. Petersburg and Leningrad region
|--------------------------------------------------------------------- | ------------ | ------------- | ----- | -----------------------------------
|
|
|CIS countries:                                                        |              |               |       |                                    
|Belarus                                                               |              | 10.40         |       | 15.60                              
|Ukraine                                                               |              | 7.00          |       | 10.50                              
|Azerbaijan, Armenia, Georgia                                          |              | 14.40         |       | 21.60                              
|Moldova, Kazakhstan, Kyrgyzstan, Tajikistan, Turkmenistan, Uzbekistan |              | 8.00          |       | 12.00                              
|Baltic states:                                                        |              |               |       |                                    
|Latvia, Lithuania, Estonia                                            |              | 5.30          |       | 7.95                               
|Latvia, Lithuania, Estonia (to mobile phones)                         |              | 10.00         |       | 15.00                              
|Other Foreign countries:                                              |              |               |       |                                    
|Europe                                                                |              |               |       |                                    
|                                                                      | Tariff 1     |               | 5.30  |                                    
|                                                                      | Tariff 2*    |               | 10.00 |                                    
|                                                                      | Tariff 3**   |               | 14.60 |                                    
|Europe (to mobile phones)                                             |              |               |       |                                    
|                                                                      | Tariff 1     |               | 10.00 |                                    
|Americas                                                              |              |               |       |                                    
|                                                                      | Tariff 1     |               | 13.00 |                                    
|                                                                      | Tariff 2***  |               | 25.90 |                                    
|Asia                                                                  |              |               |       |                                    
|                                                                      | Tariff 1     |               | 19.60 |                                    
|                                                                      | Tariff 2**** |               | 29.90 |                                    
|Africa                                                                |              | 28.20         |       | 42.30                              
|Australia, Oceania                                                    |              | 23.60         |       | 35.40                              
|Satellite telecommunications network of Thuraya                       |              | 36.00         |       | 36.00                              
|East Timor                                                            |              | 46.00         |       | 46.00                              
|Palau                                                                 |              | 40.00         |       | 40.00                              

---

48

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|REGION                                                       |              | European part of Russia (tariff zone 1) |       | Siberia (tariff zone 2)
|------------------------------------------------------------ | ------------ | --------------------------------------- | ----- | -----------------------
|
|
|CIS countries:                                               |              |                                         |       |                        
|Belarus                                                      |              | 12.50                                   |       | 18.75                  
|Ukraine                                                      |              | 7.00                                    |       | 10.50                  
|Moldova                                                      |              | 8.00                                    |       | 12.00                  
|Azerbaijan, Armenia, Georgia                                 |              | 14.40                                   |       | 21.60                  
|Kazakhstan, Kyrgyzstan, Tajikistan, Turkmenistan, Uzbekistan |              | 8.00                                    |       | 12.00                  
|Baltic states:                                               |              |                                         |       |                        
|Latvia, Lithuania, Estonia                                   |              | 8.80                                    |       | 13.20                  
|Latvia, Lithuania, Estonia (to mobile phones)                |              | 13.00                                   |       | 19.50                  
|Other Foreign countries:                                     |              |                                         |       |                        
|Europe                                                       |              |                                         |       |                        
|                                                             | Tariff 1     |                                         | 8.80  |                        
|                                                             | Tariff 2*    |                                         | 13.00 |                        
|                                                             | Tariff 3**   |                                         | 14.60 |                        
|Europe (to mobile phones)                                    |              |                                         |       |                        
|                                                             | Tariff 1     |                                         | 13.00 |                        
|Americas                                                     |              |                                         |       |                        
|                                                             | Tariff 1     |                                         | 16.00 |                        
|                                                             | Tariff 2***  |                                         | 25.90 |                        
|Asia                                                         |              |                                         |       |                        
|                                                             | Tariff 1     |                                         | 19.60 |                        
|                                                             | Tariff 2**** |                                         | 29.90 |                        
|Africa                                                       |              | 28.20                                   |       | 42.30                  
|Australia, Oceania                                           |              | 23.60                                   |       | 35.40                  
|Satellite telecommunications network of Thuraya              |              | 36.00                                   |       | 36.00                  
|East Timor                                                   |              | 46.00                                   |       | 46.00                  
|Palau                                                        |              | 40.00                                   |       | 40.00                  

---

49

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|REGION                                           |              | Far East (tariff zone 3) |       | Orenburg, Omsk, Gorno-Altai regions (tariff zone 4)
|------------------------------------------------ | ------------ | ------------------------ | ----- | ---------------------------------------------------
|
|
|CIS countries:                                   |              |                          |       |                                                    
|Belarus                                          |              | 15.70                    |       | 23.55                                              
|Ukraine                                          |              | 12.00                    |       | 18.00                                              
|Moldova                                          |              | 12.00                    |       | 18.00                                              
|Azerbaijan, Armenia, Georgia                     |              | 14.40                    |       | 21.60                                              
|Kazakhstan                                       |              | 10.00                    |       | 15.00                                              
|Kyrgyzstan, Tajikistan, Turkmenistan, Uzbekistan |              | 10.00                    |       | 15.00                                              
|Baltic states:                                   |              |                          |       |                                                    
|Latvia, Lithuania, Estonia                       |              | 11.10                    |       | 16.65                                              
|Latvia, Lithuania, Estonia (to mobile phones)    |              | 17.00                    |       | 25.50                                              
|Other Foreign countries:                         |              |                          |       |                                                    
|Europe                                           |              |                          |       |                                                    
|                                                 | Tariff 1     |                          | 11.10 |                                                    
|                                                 | Tariff 2*    |                          | 17.00 |                                                    
|                                                 | Tariff 3**   |                          | 19.60 |                                                    
|Europe (to mobile phones)                        |              |                          |       |                                                    
|                                                 | Tariff 1     |                          | 17.00 |                                                    
|Americas                                         |              |                          |       |                                                    
|                                                 | Tariff 1     |                          | 12.00 |                                                    
|                                                 | Tariff 2***  |                          | 12.00 |                                                    
|Asia                                             |              |                          |       |                                                    
|                                                 | Tariff 1     |                          | 13.30 |                                                    
|                                                 | Tariff 2**** |                          | 20.60 |                                                    
|Africa                                           |              | 28.20                    |       | 42.30                                              
|Australia, Oceania                               |              | 23.60                    |       | 35.40                                              
|Satellite telecommunications network of Thuraya  |              | 36.00                    |       | 36.00                                              
|East Timor                                       |              | 46.00                    |       | 46.00                                              
|Palau                                            |              | 40.00                    |       | 40.00                                              

---

Notes:

50

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The following tables set forth special tariffs, including VAT, offered by us for calls to the People's Republic of China as of December 31, 2006:

|      |  | REGION
|----- |  | ------
|
|
|
|
|China |  | 20.00 



According to our estimates, in 2006, we carried over 65% of the DLD traffic in the Russian Federation, with our volume of DLD traffic amounting to
9,722 million minutes (including 8,393 million minutes from end users and 1,329 million minutes from operators). The amount of DLD traffic carried by us in 2006 increased by 4%
from the previous year, which increase was primarily due to our focus on strengthening cooperation with IRCs and other local telecommunications operators by engaging them as our agents, as well as on
the development of direct business-to-client relationships with end users in the most profitable segments.

In
2006, our DLD revenue grew by 73% to RUR 31,370 million, or 51% of total revenue, compared to RUR 18,126 million, or 44% of total revenue in 2004 and
RUR 17,297 million, or 46% of total revenue in 2004.

For
additional information, see "Item 5. Operating and Financial Review and ProspectsA. Operating Results."

The
table below sets forth data on our domestic long-distance traffic for 2004, 2005 and 2006.

|                                                                  |  | 2004  |  | 2005  |  | 2006 
|----------------------------------------------------------------- |  | ----- |  | ----- |  | -----
|Volume of domestic long-distance traffic (in millions of minutes) |  | 9,094 |  | 9,347 |  | 9,722
|Growth of volume of domestic long-distance traffic                |  | 10.6% |  | 2.8%  |  | 4.0% 



Prior to January 1, 2006, in all regions of Russia except for Moscow, we were paid by IRCs and alternative operators for the throughput of outgoing DLD
traffic at a specified settlement rate and paid regional operators for the termination of DLD calls using a specified termination settlement rate. In Moscow, where we own international and
long-distance switches, we rendered customer services directly to end users through MGTS.

Pursuant
to new regulations, as of January 1, 2006, we have been providing DLD/ILD services to end users throughout Russia and have established tariffs in each of the 85 regions
of Russia at rates similar to those charged by IRCs in 2005. At the end of 2006, the FST decreased tariffs for the provision of DLD services in 46 regions for households and 52 regions for
organizations effective from February 1, 2007. The new tariffs are 1% to 6% lower, depending on the region of Russia and the tariff zone. In Moscow, the tariffs were lowered by 5%.

The
tables below illustrate the per-minute tariffs charged by us as of January 2004, 2005, 2006 and 2007 to organizations and other customers for domestic
long-distance calls between Moscow and other territories divided into various zones, and as of January 2006 and 2007 for domestic long-distance calls

51

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between
St. Petersburg and other territories divided into various zones. We also present tables illustrating the per-minute tariffs charged by us for both Moscow and
St. Petersburg customers as of February 2007, when a new tariff schedule took effect. As Moscow and St. Petersburg are the largest Russian cities, they also represent the largest and our
most important markets for DLD/ILD services. Our tariffs are set and charged in rubles. All tariffs set forth below include VAT.

Domestic long-distance tariffs in rubles

January 2004 (Moscow)

|       |  | Households |  | Organizations
|------ |  | ---------- |  | -------------
|
|Zone 1 |  | 2.50       |  | 1.50         
|Zone 2 |  | 4.50       |  | 2.50         
|Zone 3 |  | 5.50       |  | 3.20         
|Zone 4 |  | 6.50       |  | 3.80         
|Zone 5 |  | 7.20       |  | 4.40         
|Zone 6 |  | 7.20       |  | 4.40         

January 2005 (Moscow)

|       |  | Households |  | Organizations
|------ |  | ---------- |  | -------------
|
|Zone 1 |  | 2.50       |  | 1.50         
|Zone 2 |  | 4.50       |  | 2.50         
|Zone 3 |  | 5.50       |  | 3.20         
|Zone 4 |  | 6.50       |  | 3.80         
|Zone 5 |  | 7.20       |  | 4.40         
|Zone 6 |  | 7.20       |  | 4.40         

January 2006 (Moscow)

|       |  | Households |  | Organizations
|------ |  | ---------- |  | -------------
|
|Zone 1 |  | 2.50       |  | 1.50         
|Zone 2 |  | 4.50       |  | 2.50         
|Zone 3 |  | 5.50       |  | 3.20         
|Zone 4 |  | 6.50       |  | 3.80         
|Zone 5 |  | 7.20       |  | 4.40         
|Zone 6 |  | 7.20       |  | 4.40         

52

---



January 2007 (Moscow)

|       |  | Households |  | Organizations
|------ |  | ---------- |  | -------------
|
|Zone 1 |  | 2.50       |  | 1.50         
|Zone 2 |  | 4.50       |  | 2.50         
|Zone 3 |  | 5.50       |  | 3.20         
|Zone 4 |  | 6.50       |  | 3.80         
|Zone 5 |  | 7.20       |  | 4.40         
|Zone 6 |  | 7.20       |  | 4.40         

February 2007 (Moscow)

|       |  | Households |  | Organizations
|------ |  | ---------- |  | -------------
|
|Zone 1 |  | 2.38       |  | 1.50         
|Zone 2 |  | 4.28       |  | 2.50         
|Zone 3 |  | 5.23       |  | 3.20         
|Zone 4 |  | 6.18       |  | 3.80         
|Zone 5 |  | 6.84       |  | 4.40         
|Zone 6 |  | 6.84       |  | 4.40         

January 2006 (St. Petersburg)

|       |  | Households |  | Organizations
|------ |  | ---------- |  | -------------
|
|Zone 1 |  | 1.90       |  | 0.95         
|Zone 2 |  | 3.40       |  | 1.70         
|Zone 3 |  | 4.50       |  | 2.25         
|Zone 4 |  | 5.70       |  | 2.85         
|Zone 5 |  | 6.70       |  | 3.35         
|Zone 6 |  | 7.00       |  | 3.50         

January 2007 (St. Petersburg)

|       |  | Households |  | Organizations
|------ |  | ---------- |  | -------------
|
|Zone 1 |  | 1.90       |  | 0.95         
|Zone 2 |  | 3.40       |  | 1.70         
|Zone 3 |  | 4.50       |  | 2.25         
|Zone 4 |  | 5.70       |  | 2.85         
|Zone 5 |  | 6.70       |  | 3.35         
|Zone 6 |  | 7.00       |  | 3.50         

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February 2007 (St. Petersburg)

|       |  | Households |  | Organizations
|------ |  | ---------- |  | -------------
|
|Zone 1 |  | 1.90       |  | 0.95         
|Zone 2 |  | 3.40       |  | 1.70         
|Zone 3 |  | 4.50       |  | 2.25         
|Zone 4 |  | 5.70       |  | 2.85         
|Zone 5 |  | 6.70       |  | 3.35         
|Zone 6 |  | 7.00       |  | 3.50         

In addition, from January 2006 to August 2007, we had special tariffs effective only for government-funded organizations for domestic
long-distance calls between the Chukotka autonomous area and other territories divided into various zones. The tables below illustrate the per-minute special tariffs charged by
us as of May 2006, January 2007 and August 2007 to government-funded organizations and other customers for domestic long-distance calls between the Chukotka autonomous area and other
territories divided into various zones. All tariffs set forth below include VAT.

May 2006 (the Chukotka autonomous area)

|       |  |       |  |       |  | Government-funded organizations |  |       |  |      
|------ |  | ----- |  | ----- |  | ------------------------------- |  | ----- |  | -----
|
|
|
|Zone 1 |  | 2.50  |  | 1.75  |  | 3.54                            |  | 2.48  |  | 3.54 
|Zone 2 |  | 4.50  |  | 3.15  |  | 8.26                            |  | 5.78  |  | 8.26 
|Zone 3 |  | 8.00  |  | 5.60  |  | 11.8                            |  | 8.26  |  | 11.8 
|Zone 4 |  | 10.00 |  | 7.00  |  | 14.16                           |  | 9.91  |  | 14.16
|Zone 5 |  | 16.00 |  | 11.20 |  | 18.88                           |  | 13.22 |  | 21.24
|Zone 6 |  | 21.24 |  | 12.60 |  | 21.24                           |  | 14.87 |  | 25.96

January 2007 (the Chukotka autonomous area)

|       |  |       |  |       |  | Government-funded organizations |  |       |  |      
|------ |  | ----- |  | ----- |  | ------------------------------- |  | ----- |  | -----
|
|
|
|Zone 1 |  | 2.50  |  | 1.75  |  | 3.54                            |  | 2.48  |  | 3.54 
|Zone 2 |  | 4.50  |  | 3.15  |  | 8.26                            |  | 5.78  |  | 8.26 
|Zone 3 |  | 8.00  |  | 5.60  |  | 11.8                            |  | 8.26  |  | 11.8 
|Zone 4 |  | 10.00 |  | 7.00  |  | 14.16                           |  | 9.91  |  | 14.16
|Zone 5 |  | 16.00 |  | 11.20 |  | 18.88                           |  | 13.22 |  | 21.24
|Zone 6 |  | 21.24 |  | 12.60 |  | 21.24                           |  | 14.87 |  | 25.96

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August 2007 (the Chukotka autonomous area)

|       |  |       |  |       |  | Government-funded organizations |  |       |  |      
|------ |  | ----- |  | ----- |  | ------------------------------- |  | ----- |  | -----
|
|
|
|Zone 1 |  | 2.50  |  | 1.75  |  | 3.54                            |  | 2.48  |  | 3.54 
|Zone 2 |  | 4.50  |  | 3.15  |  | 8.26                            |  | 5.78  |  | 8.26 
|Zone 3 |  | 8.00  |  | 5.60  |  | 11.8                            |  | 8.26  |  | 11.8 
|Zone 4 |  | 10.00 |  | 7.00  |  | 14.16                           |  | 9.91  |  | 14.16
|Zone 5 |  | 16.00 |  | 11.20 |  | 18.88                           |  | 13.22 |  | 21.24
|Zone 6 |  | 21.24 |  | 12.60 |  | 21.24                           |  | 14.87 |  | 25.96

These special tariffs are no longer in effect, and we currently have no special tariffs for government-funded organizations for domestic
long-distance calls. Government-funded organizations pay us at tariffs set for organizations.



While domestic and international long-distance telephone services remained the largest source of our revenues in 2006, we continued to expand
the range of services we provide to both end users and operators.

VoIP transit service:VoIP transit allows us to provide voice traffic transit through our high-quality
IP/MPLS-based network. In 2006, we continued to expand our service area, and modernized our VoIP network in order to increase bandwidth and improve quality. Connections to our VoIP network
can currently be made through access points in 29 Russian cities and in Stockholm. By using our primary trunk network, connections to the VoIP network can be made at
400 access points.

VPN service:Virtual Private Network allows us to join offices and branches of corporate clients or operators into a private
secured telecommunications network and to provide data transmission within a particular company or between and among several different companies or organizations over our high-quality
IP/MPLS-based network. Since 2005, we have been providing this service throughout Russia and in Stockholm. In 2006, we continued to develop additional and new services based on the same
VPN technology, such as voice VPN and the integration of VPN with our Intelligent Network services (i.e., FreePhone).

Trunk Internet Access Service:In 2005, we began providing Internet access services to corporate clients and operators based
on our IP/MPLS network. We can currently provide Internet access services in 29 Russian cities and in Stockholm.

ISDN Service:ISDN allows end users to transfer voice and data traffic over the same phone line. In 2006, we continued to
expand our ISDN services and, as a result, ISDN services are currently accessible in 76 regions of Russia.

Flexible Access Multiplexer Network Development:Due to the creation of a modern, flexible multiplexer network in 2002
and 2003, we are able to offer our customers digital channels with high throughput capacity. As of December 31, 2006, digital channels were available to customers in 122 Russian
cities. Considering the high level of demand for this service in the Russian telecommunications market, we are actively working to expand our flexible access multiplier network.

Intelligent Network Services:Our Intelligent Network is a technological platform that allows us to provide certain
value-added services such as "FreePhone," "Premium Rate Calls" and "Universal Access Number." In 2006, we launched a new intelligent platform to upgrade our value-added services,

55

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further
improve quality and enable us to offer a growing range of value-added services in every region of Russia.

We
continue to actively promote our Intelligent Network services. In 2006, our revenues from this service increased by 77% to RUR 761 million from
RUR 430 million in 2005.

International Roaming:We route international roaming signal messages to 176 countries (531 international mobile
telecommunications operators). Russia's three largest mobile operators, Vimpelcom, Mobile TeleSystems and MegaFon use the services of our international signal network.

Televoting:In 2006, we continued to expand our Televoting service launched in 2003. Televoting is a
mass-calling processing service for TV, radio and other press events which involve a high volume of calls. Televoting is provided through our Intelligent Network, which uses sophisticated
equipment and computer software to process the high volume of calls and visually display the results. The advantage of our Televoting service, compared to similar services of other operators, is that
calls to Televoting numbers are free for end users of the PSTN.

The
following chart lists the services we currently provide to end users and operators:

|Principal types of services                              |                                                | Customer category                                             |                                                          | Scope of service                                                               
|-------------------------------------------------------- | ---------------------------------------------- | ------------------------------------------------------------- | -------------------------------------------------------- | -------------------------------------------------------------------------------
|International telecommunications services                |                                                |                                                               |                                                          |                                                                                
|Automated international telephone communications         |                                                | Russian corporate and private customers                       |                                                          | Access from Moscow to any country                                              
|Operator-assisted international telephone communications |                                                | Russian corporate and private customers                       |                                                          | Access from Moscow to any country                                              
|Russia Direct                                            |                                                |                                                               |                                                          |                                                                                
|1.                                                       | Payment by the destination subscriber (Moscow) |                                                               | Russian corporate and private customers traveling abroad |                                                                                
|2.                                                       | Payment by prepaid card                        |                                                               |                                                          |                                                                                
|                                                         |                                                |                                                               |                                                          |                                                                                
|                                                         |                                                |                                                               |                                                          |                                                                                
|                                                         |                                                |                                                               |                                                          |                                                                                
|                                                         |                                                |                                                               |                                                          |                                                                                
|                                                         |                                                |                                                               |                                                          |                                                                                
|Home Country Direct Service                              |                                                | Foreign operators (for their customers traveling to Russia)   |                                                          | Access from 53 Russian regions to 43 countries through 49 operators            
|Collect Call (paid by foreign caller)                    |                                                | Russian corporate and private customers                       |                                                          | United States                                                                  
|IFS                                                      |                                                | Foreign operators for their subscribers                       |                                                          | Access from 53 Russian regions to 23 countries through 25 operators            
|IFS for Russian customers                                |                                                | Russian corporate and private customers and Russian operators |                                                          | Access from Turkey and Finland to Moscow                                       
|International ISDN                                       |                                                | Russian corporate and private customers; Russian operators    |                                                          | Access to and from 76 Russian regions to/from 37 countries through 43 operators
|                                                         |                                                |                                                               |                                                          |                                                                                

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|Leasing of international channels and circuits                                |  | Russian corporate customers; Russian and foreign operators                                                         |                  | Direct digital flows for leases arranged to 29 countries through 34 operators. For other countries, leased channels are arranged by transit through third countries
|----------------------------------------------------------------------------- |  | ------------------------------------------------------------------------------------------------------------------ | ---------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Other operators' international telephone traffic throughput services          |  | Russian operators of the public telephone network and associated networks                                          |                  | Available from any location in Russia to any country                                                                                                               
|International roaming services for mobile network subscribers                 |  | Russian operators of mobile networks; foreign operators                                                            |                  | Available to five Russian mobile network operators for 170 countries through 531 foreign operators                                                                 
|Direct unswitched transit of international flows/channels via Russia          |  | Foreign operators                                                                                                  |                  | Can be arranged between points of access to Russia of all operating international trunk networks                                                                   
|Switched transit of international traffic via Russia                          |  | Foreign operators                                                                                                  |                  | Direct international exchange lines opened for 68 countries. Transit services provided to 136 foreign operators, including to 11 CIS countries                     
|Prepaid card international                                                    |  | Russian private and corporate                                                                                      |                  | Access:                                                                                                                                                            
|telephone communications                                                      |  | customers, including those                                                                                         |                  |                                                                                                                                                                   
|                                                                              |  |                                                                                                                    | traveling abroad |                                                                                                                                                                    
|VISA Electron card international                                              |  | Russian private and corporate                                                                                      |                  | Access:                                                                                                                                                            
|telephone communications                                                      |  | customers, including those                                                                                         |                  |                                                                                                                                                                   
|                                                                              |  |                                                                                                                    | traveling abroad |                                                                                                                                                                    
|Domestic long-distance telecommunications services                            |  |                                                                                                                    |                  |                                                                                                                                                                    
|Automated domestic long-distance telephone communications                     |  | Russian corporate and private customers                                                                            |                  | Access from Moscow to any location in Russia                                                                                                                       
|Operator-assisted domestic long-distance telephone communications             |  | Russian corporate and private customers; Russian operators of the public telephone network and associated networks |                  | Access from Moscow to any location in Russia                                                                                                                       
|Other operators' domestic long-distance telephone traffic throughput services |  | Russian operators of the public telephone network and associated networks                                          |                  | Throughout Russia                                                                                                                                                  
|Intelligent Network national services                                         |  | Russian corporate and private customers                                                                            |                  | Access to services from all 88 Russian regions                                                                                                                     
|Domestic and international long-distance services through VoIP                |  | Russian operators                                                                                                  |                  | Eleven cities of Russia and subject to access to one of the 400 access points of our primary network resources                                                     
|Prepaid card Internet access                                                  |  | Russian corporate and private customers                                                                            |                  | Moscow and Moscow region                                                                                                                                           
|                                                                              |  |                                                                                                                    |                  |                                                                                                                                                                    

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|ISDN domestic long-distance services                                                             |  | Russian corporate and private customers; Russian operators of the public telephone network and associated networks |  | Access to services from/to 76 regions and five associated networks of alternative operators     
|------------------------------------------------------------------------------------------------ |  | ------------------------------------------------------------------------------------------------------------------ |  | ------------------------------------------------------------------------------------------------
|Leasing of domestic long-distance channels and circuits                                          |  | Russian corporate customers; special users; Russian communications operators; television and radio companies       |  | Throughout Russia                                                                               
|Group domestic long-distance telephone communications services                                   |  | Government ministries and agencies                                                                                 |  | Throughout Russia                                                                               
|Data transmission via MMTEL network                                                              |  | Corporate and private customers                                                                                    |  | Moscow                                                                                          
|Open multimedia communications network services                                                  |  | Government authorities; Russian corporate and private customers                                                    |  | Services provided to a limited range of users and nine public access sites in 71 Russian regions
|Prepaid card domestic long-distance telephone communications                                     |  | Russian corporate and private customers                                                                            |  | Access from Moscow to any location in Russia                                                    
|Radio and television broadcasting services                                                       |  |                                                                                                                    |  |                                                                                                 
|Radio and TV broadcasting                                                                        |  | Television and radio companies                                                                                     |  | Throughout Russia                                                                               
|Radio and TV broadcasting exchange                                                               |  | Russian and foreign television and radio companies                                                                 |  | Throughout Russia and foreign countries                                                         
|References and inquiries                                                                         |  |                                                                                                                    |  |                                                                                                 
|Reference and inquiry desks of international entities (8, dial tone, 190)                        |  | Russian corporate and private customers; foreign operators                                                         |  | Throughout Russia                                                                               
|MMT references and inquiries (07)                                                                |  | Russian corporate and private customers; Russian operators                                                         |  | Moscow                                                                                          
|MMT references and inquiries (245 0015)                                                          |  | Russian corporate and private customers; Russian operators                                                         |  | Moscow                                                                                          
|Additional services                                                                              |  |                                                                                                                    |  |                                                                                                 
|MMT additional services such as rent of its premises for telecommunications equipment allocation |  | Corporate and private customers                                                                                    |  | MMT buildings                                                                                   

In 2006, our revenues from the provision of services other than the transit of DLD and ILD traffic amounted to RUR 12,438 million, or 20%
of our revenue for the reporting period. In 2005 and 2004, our revenues from the provision of services other than the transit of DLD and ILD traffic amounted to RUR 9,326 million and RUR
6,920 million, or 23% and 19% of our revenue, respectively.



Prior to January 1, 2006, we were the only nationwide carrier of wholesale long-distance and international traffic in Russia. New regulations
enacted under the Communications Law that took effect in 2006 opened up the DLD/ILD market by allowing telecommunications operators to apply for DLD/ILD telecommunications services licenses. However,
we are still considered by the FAS to be a

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monopoly
and we remain a major nationwide telecommunications services provider and carrier of wholesale DLD and ILD traffic in the Russian Federation.

To
date, in addition to us, 29 operators have received DLD/ILD telecommunications services licenses. Of these operators, only MTT, TransTelecom and Golden Telecom have a network
infrastructure compliant with the license requirements and are currently providing DLD/ILD telecommunications services to end users on a nationwide basis. We expect that Arctel and Equant will begin
providing nationwide DLD/ILD telecommunications services in the near future. In addition, certain VoIP operators continue to provide DLD/ILD telecommunications services in violation of the law, which
has resulted in a loss of market share for us.

In
the channel leasing market, we consider the following companies to be our major competitors: TransTelecom, FSUE Space Communications, TeliaSonera and Rascom, which is a subsidiary of
Golden Telecom. See "Item 3. Key InformationD. Risk FactorsRisks Relating to Our BusinessWe face increasing competition from alternative operators that
may result in reduced operating margins and loss of market share."

Currently,
our network has greater territorial coverage than any of our competitors in Russia. By keeping our network well maintained and technically updated, we are able to keep the
cost of our services comparatively low.

We
review and conduct research on the competitive environment in the communications market for purposes of monitoring the impact of competitors on our activities. In the course of
building our development strategy, we take into consideration the competitive situation and the dynamics of our development and the activities of alternative operators and operators of overlay
networks. Currently, we consider the following operators to be our main competitors:

MTT

Multiregional Transit-Telecom, a joint venture of JSFC Sistema and CJSC Gamma Capital, was established in October 1994 with the objective of creating a transit
telecommunications network capable of integrating the networks of mobile and fixed-line operators. MTT's network is based on four ISC's, eight transit nodes built in each federal district
of the Russian Federation and leased trunk lines. MTT also has a number of local telephone exchanges allowing interconnection with local mobile and fixed-line operators.

MTT
was granted a license to provide DLD/ILD communications services in May 2005 and started to provide such services to Moscow end users in February 2006, and to end users throughout
Russia in March 2006.

Golden Telecom, Inc.

Golden Telecom, established in June 1999, is an operator offering integrated communications services and Internet access services in the major cities of Russia
and the CIS. Golden Telecom currently offers local, domestic long-distance and international telecommunications services through an allocated network and through the PSTN, data
transmission services, cellular communications services, Internet access, ISDN services, videoconferencing and other services.

Golden
Telecom was granted a license to provide DLD/ILD telecommunications services in May 2005. In January 2006, Golden Telecom completed the construction of its network, and it began
providing DLD and ILD services throughout Russia in January 2007.

We
hold a 10.97% stake in Golden Telecom.

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TransTelecom

TransTelecom was incorporated in 1997 for the purpose of upgrading the information and technology segments in the infrastructure of the Ministry of Railways of
the Russian Federation by constructing a high-bandwidth telecommunications network in the railroad precinct based on SDH, DWDM and IP/MPLS technologies, as well as promoting the networks'
profit-making capabilities. TransTelecom is currently a wholly-owned subsidiary of OJSC Russian Railways, a company controlled by the Russian government.

TransTelecom
was granted a license to provide DLD/ILD telecommunications services in July 2005 and completed the development of its network infrastructure for the provision of DLD/ILD
services by the end of 2006. TransTelecom is currently licensed to provide DLD/ILD services and traffic transit, lease communications channels and provide telematic and data transmitting services. In
September 2007, TransTelecom started providing DLD/ILD services to end users.

Equant (Orange Business Services)

CLL Equant, a subsidiary of the Russian telecommunications company Equant, was formed in 2002 after merging the international parent company Equant with the
telecommunications company Global One. Equant operates its own networks based on FOLs and satellite channels to provide telecommunications services and solutions to corporate clients. Since October
2006, Equant has provided telecommunications services under the new "Orange Business Services" brand name.

In
2006, Equant obtained a license for the provision of long-distance telecommunications services and thereafter completed construction of its network infrastructure for the
provision of DLD/ILD services. We expect that Equant will begin to offer DLD/ILD telecommunications services to end users in the near future.

Arctel

Arctel, incorporated in 1999, is an operator providing local, inter-regional, DLD/ILD telecommunications services, intelligent telecommunications services,
construction of complex telephone networks in buildings and offices, call center services and other services.

Arctel
obtained a license for the provision of long-distance telecommunications services in December 2005. In June 2007, Arctel announced that it had completed construction
of its DLD/ILD network infrastructure based on four ISCs and seven domestic transit nodes with interconnections in all of Russia's regions. We expect that Arctel will start providing DLD/ILD
telecommunications services to end users in the near future.

The Telecommunications Industry in Russia

The Russian telecommunications market is generally unsaturated and rapidly developing. According to Mininformsvyaz, the Russian market for telecommunications
services grew by 27% to RUR 783.6 billion in 2006 from RUR 618.9 billion in 2005. The sub-sectors that expanded most rapidly included mobile communications services and data
transmission services. In 2006, the telecommunications industry comprised 3.1% of Russia's total GDP, as compared to 3.0% in 2000.

In
2006, according to Mininformsvyaz, fixed telephone penetration in Russia's regions continued to increase and reached 31.1% compared to 30.0% in 2005. In response to an increase in the
penetration rates, the capacity of city and rural fixed telecommunications networks has been expanded by 2.7 million phone numbers compared to 3.4 million phone numbers put into
operation in 2005.

Mobile
telecommunications services continued to demonstrate significant growth with the number of subscribers increasing to approximately 150 million in 2006, as compared to
120 million in 2005.

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According
to Mininformsvyaz, the penetration rate for mobile phones in 2006 exceeded 100% in Russia, particularly in Moscow and St. Petersburg, where many subscribers have more than one
mobile phone.

Liberalization of the Russian Telecommunications Market

Reform of the Russian telecommunications industry began with the introduction of the new Communications Law in 2004 and has intensified as implementing
regulations have been enacted thereunder. As we were the fixed-line DLD/ILD service provider monopoly in Russia until 2006, and continue to hold a dominant position in the Russian DLD/ILD
telecommunications services market, the ongoing regulatory reform and related restructuring of the DLD/ILD market has had and will continue to have a significant impact on our business. Most
significantly, the new regulations opened up the DLD/ILD market by allowing telecommunications operators to apply for
DLD/ILD telecommunications services licenses, and radically restructured our relationships with IRCs, local operators and subscribers.

In
February 2005, the Russian government adopted a list of licensing requirements for telecommunications operators, including requirements for operators seeking a DLD/ILD
telecommunications service license. Among other things, operators seeking to obtain such a license are required to have interconnection points in each of the 85 Russian regions and network capacity to
offer DLD services throughout the entire territory of Russia. To date, in addition to us, 29 DLD/ILD licenses have been issued, and and three license recipients, MTT, Golden Telecom and TransTelecom,
commenced offering their DLD/ILD communication services to end users throughout Russia in March 2006, January 2007 and September 2007, respectively. Other companies are expected to commence such
services in the near future.

The
new regulations have also radically restructured our relationships with IRCs, local operators and subscribers. In particular, new regulations that came into effect on
January 1, 2006 require (i) operators of DLD and ILD telephone networks to provide long-distance services directly to end users and bill these customers for such services;
(ii) IRCs to provide DLD/ILD operators with intra-regional call origination and termination services and (iii) local telephone network operators to provide IRCs with local call
origination and termination services. Thus, under this new structure, we provide services to and bill end users, IRCs provide services to and bill us, and local operators provide services to and bill
IRCs, with settlements between operators conducted in the order of the services rendered. Subscriber billing and collection activities, as well as other customer service functions, are to be performed
by the DLD/ILD operator or its agents.

Additionally,
a new set of regulations has been enacted that endeavors to restructure the interconnection system. In March 2005, the Russian government approved the Rules of
Interconnection and Interaction of Communication Networks, or the Interconnection Rules. In accordance with the Interconnection Rules, we (and other DLD/ILD service providers) are required to switch
to a new interconnection and settlement system for DLD/ILD traffic transit with regional and local operators whereby we provide DLD/ILD services directly to end users in all regions with regional and
local operators acting as our intermediaries. Under this new system, end users choose their DLD/ILD provider by dialing an additional prefix when initiating a call (carrier selection, or "hot choice,"
system) or by signing an agreement to set a default DLD/ILD provider (pre-selection system). Mininformsvyaz assigned carrier selection prefixes to us and MTT in December 2005, to Golden
Telecom in December 2006 and to TransTelecom in June 2007.

The
Communications Law also imposes certain restrictions on operators occupying a "significant position" in the DLD/ILD market, which is defined as an operator holding, together with
affiliates, more than 25% of the numbering capacity or throughput capacity in a particular geographic numbering zone or throughout Russia. In particular, the Interconnection Rules and Government
Decree No. 627, dated October 19, 2005 (as amended), both effective from January 1, 2006, provide for the government

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regulation
of interconnection and throughput tariffs established by such operators. In addition, such operators are required to develop standard interconnection contracts and publish them as a public
offer available to all operators intending to use such interconnection services. We were added to the list of "significant operators" in December 2005. Under Government Decree No. 627, the FAC
is required to set the marginal interconnection and throughput tariffs taking into account the compensation surcharge determined by the FST.

A
compensation surcharge is an additional amount paid by intra-regional and DLD/ILD operators to local and intra-regional operators, respectively, for the initiation of intra-regional
and DLD/ILD calls, respectively, in order to compensate for losses incurred by local operators. The amount of the compensation surcharge is determined by the FST based on the amounts paid by a local
operator to cover the difference between its revenues from intra-regional and local telecommunications services rendered at regulated tariffs and its economically justifiable costs relating to such
services. In determining the compensation surcharge, the FST applies a certain profit margin as well. In accordance with Government Decree No. 627, the compensation surcharge is valid until
January 1, 2008. However, no assurance can be given that this period will not be extended beyond this date.

On
the basis of Government Decree No. 637, dated October 24, 2005 (as amended), providing for government regulation of certain tariffs, including DLD tariffs, the FST
established the maximum tariffs we may charge for DLD calls initiated by subscribers from various Russian regions, effective from January 1, 2006. See "Competition and Pricing"
below for a further description of the government's regulation of our tariffs.

Both
Decree No. 627 and Decree No. 637 declare the intention of the Russian government to eliminate the practice of cross-subsidies in the sphere of regulated
services by increasing tariffs to a level that allows operators to recover their economically feasible costs and earn a fixed profit by 2008. From 2008, the regulation of tariffs are expected to be
set using certain marginal prices established by the government. Notwithstanding the government's intent to eliminate cross-subsidies, its failure to do so would inhibit the flexibility of our tariff
policy in the sphere of DLD/ILD services and prevent us from becoming more competitive as the DLD/ILD telecommunications services market opens up to competition.

For
additional information regarding the risks we face, see "Item 3. Key InformationD. Risk FactorsRisk Relating to the Regulatory Reform of the Russian
Telecommunications IndustryImplementation of the new Federal Law on
Communications", or the Communications Law, may cause us to lose our dominant position in the Russian long-distance telecommunications market, may impact our ability to timely and
accurately prepare our financial statements and impose additional financial burdens on us, which may materially and adversely affect our business, financial condition and results
of operations."

Regulation of the Russian Telecommunications Industry

The provision of telecommunications services in Russia is governed by federal legislation, which includes federal laws, presidential and governmental decrees,
government regulations and orders, procedures, letters and instructions issued by ministries and other federal executive authorities.

Our
business operates in an uncertain regulatory environment. The principal legal acts regulating telecommunications in Russia are the Communications Law of July 7, 2003, as
amended, and the Natural Monopolies Law.

The
Communications Law establishes the legal basis for state supervision and development of the communications industry, including granting licenses to provide telecommunications
services, allocation of radio frequencies, certification of equipment compatibility, development of comprehensive public networks and supervision of fair competition among telecommunications
providers. The

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Communications
Law provides for equal rights of individuals and legal entities to participate in certain categories of telecommunications operations and does not currently contain any special
restrictions with regard to participation in the Russian telecommunications market by foreign persons. All users and operators, in compliance with the terms of the licenses issued to them, have the
right to access and interconnect their networks with the PSTN of Russia.

The
Natural Monopolies Law establishes the legal basis for the federal regulation of natural monopolies (such as us) and provides for state control over tariffs and other activities of
natural monopolies. The FST oversees the implementation of this law, which significantly impacts the ability of certain categories of telecommunications providers to set tariffs. The Natural
Monopolies Law and the Federal Law on Competition and the Limitation and Control over the Monopolistic Activity on Goods Market also control the types of transactions into which a regulated entity may
enter. Regulated entities are subject to continuous reporting requirements, which include the submission of plans for capital investments. In addition, regulated entities may not refuse to enter into
contracts with particular consumers if required by the regulatory authority.

As
the primary provider of long-distance telecommunications in Russia, we have been subject to regulation under these laws. However, we have recently engaged in discussions
with the FST to exclude us from the list of natural monopolies as we are no longer the sole provider of DLD/ILD telecommunications services in Russia. Nonetheless, we cannot assure you that the FST
will remove us from the list of monopolies and cease regulating us under the Natural Monopolies Law.

Regulatory Authorities

The regulatory framework of the telecommunications industry in Russia has changed in recent years, and the authorities regulating the telecommunications industry
often have vaguely defined powers.

In
March 2004, the Ministry of Communications was briefly merged with the Ministry of Transportation into the Ministry of Transportation and Communications which was granted authority
over the telecommunications industry. In May 2004, the government reversed this decision and granted the newly-formed Ministry of Information Technologies and Communications the authority to regulate
the Russian telecommunications industry.

The Ministry of Information Technologies and Communications, or Mininformsvyaz,is currently responsible for determining governmental
policy for telecommunications, adopting rules and regulations on the basis of federal laws and proposing the allocation of the federal budget for the telecommunications industry.

The Federal Service on Supervision in the Area of Mass Media, Communications and Protection of Cultural Heritage, or
Rossvyazokhrancultura,was established pursuant to Presidential Decree No. 320, dated March 12, 2007, as a result of the merger of the Federal Service on
Supervision in the Area of Mass Media and Protection of Cultural Heritage and Federal Service on Supervision in the Area of Communications, or Rossvyaznadzor. Prior to the merger, Rossvyaznadzor was
responsible for the issuance of communication licenses and permissions, registration of radio-electronic and high-frequency equipment, technical supervision of networks and network
equipment, monitoring and enforcement of compliance by communication operators with applicable regulations, terms of their licenses and terms of the use of frequencies allocated to them.
Rossvyazokhrancultura retains the functions and powers of both predecessor federal services, including Rossvyaznadzor, and reports directly to the government of the Russian Federation. Under Russian
Government Decree No. 354 dated June 6, 2007, Rossvyazokhrancultura, in the area of communications, is responsible for issuance of communication licenses and permissions, registration of
radio-electronic and high-frequency equipment, supervision of network construction and equipment, compliance by communication operators with applicable regulations, including, among
others, traffic transmission and routing rules, networks and PSTN

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interconnection
rules, use of allocated number capacity, allocation and use of frequencies, and other requirements.

The Federal Agency on Communications, or the FAC,is responsible for the development and implementation of a long-term policy
for frequency allocation. The FAC also manages state property relating to the telecommunications industry.

The State Radio Frequencies Commissionis an inter-agency coordination body acting under Mininformsvyaz which is responsible for the
regulation of radio frequency spectrum and develops a long-term policy for frequency allocation in Russia.

The FSTregulates certain tariffs in the sphere of telecommunications, including the tariffs on local, intra-regional and DLD calls by
subscribers of PSTN, installation and subscription fees and telephone line access tariffs. The FST also maintains the list of natural telecommunications monopolies and has other supervisory and
enforcement functions under the Natural Monopolies Law.

The FASsupervises competition regulations and enforces anti-monopoly laws and regulations.

Licensing to Provide Services

The Communications Law generally requires that any provider of telecommunications services must obtain a license prior to commencing such services, unless such
services are essentially for internal use (such as within an automobile, on a vessel, in an airplane or in another means of transportation), are for internal production or technological purposes, or
are used solely to service public administration, defense, security and law enforcement authorities.

The
Communications Law expressly allows any entity, foreign or domestic, to own and operate communications facilities in Russia, although it also allows for the enactment of legislation
specifying certain communications networks and facilities that can only be owned by the federal government. Such legislation has not yet been enacted.

Telecommunications
licenses are issued and renewed for periods ranging from three to twenty five years and several different licenses to provide varying communications services may be
issued to one entity. Currently, renewals may be obtained upon application to the licensing agency and upon verification by appropriate governmental authorities that the licensee has conducted its
activities in accordance with the licenses. The licensing agency has fairly broad discretion with respect to both issuance and renewal procedures. The Communications Law provides that a license may
not be transferred or assigned.

If
terms of a license are not fulfilled or a service provider violates applicable legislation, the license may be suspended or terminated. Licenses may be suspended for various reasons,
including:



In
addition, licenses may be terminated for various reasons by the court, including:



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The
license may also be terminated in a number of cases, including liquidation of a license holder or failure to pay a license fee on time.

Fees
for issuing licenses are determined as follows:



While
these fees are nominal, telecommunications licenses traditionally also require financial contributions to the development of the PSTN of Russia.

Licenses
generally contain detailed conditions regarding the date by which services must begin, technical standards, the number of lines that must be in service and the percentage
capacity, which must be operative by specified dates. Failure by us to satisfy any such requirements could lead to the revocation of one or more of our licenses, which could have a material adverse
effect on our business.
See "Item 5. Operating and Financial Review and ProspectsC. Research and Development, Patents and Licenses."

Radio Frequency Allocation

Regulation of the use of radio frequencies and spectrum allocation are under the exclusive control of Mininformvyaz through its subordinated bodies. The FAC
allocates radio frequencies based on decisions of the State Radio Frequencies Commission. A frequency allocation is necessary to receive a license to provide telecommunications services.

Equipment Certification

Certain telecommunications equipment used in Russia is subject to periodic mandatory certification in order to confirm its compliance with established standards
and technical requirements. Certificates of compliance are issued to the supplier by the FAC on the basis of the FAC's review. Moreover, certain high-frequency equipment, a list of which
is set forth in Government Decree No. 539 of October 12, 2004, as amended, manufactured or used in, or imported into, Russia requires special permission from Rossvyaznadzor. Special
permissions are specific to the entity that receives them and are non-transferable. Failure to receive such certification could result in the mandatory cessation of the use of such
equipment. To date, we have not experienced significant problems as a result of the failure of any of our equipment suppliers to obtain necessary certifications.

In
addition, the Federal Security Service is empowered to certify and issue licenses for the designing, production, selling, using and importing of encryption devises, including
telecommunications equipment with encryption capabilities.

Universal Services Fund

The Communications Law provides for the establishment of a "universal services reserve fund" to assist with the development of Russia's telecommunications
infrastructure and the provision of accessible universal telecommunications services for the entire Russian population at regulated tariffs. Such services include local telephony through payphones,
free 24-hour access to emergency services and Internet access through collective access points. This reserve fund is aimed at eliminating the practice of cross-subsidies by compensating
operators for certain mandatory, loss-making local services. The universal service fund concept has been used in some developed countries and in Eastern Europe. It is funded by a levy
imposed on all communication services providers, including us, in the amount of 1.2% of revenues from telecommunications services less the amount of taxes paid by each of its subscribers.

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Competition and Pricing

Mininformvyaz, the FST and Rossvyazokhrancultura are the principal executive authorities regulating our activities. In particular, Mininformvyaz, as the principal
governmental agency for the industry, determines the level and principal features of competition in the telecommunications market, while the FST is responsible for setting the tariffs on which our
profitability, in significant part, depends. Rossvyazokhrancultura issues licenses and permissions, allocates frequencies, registers radio-electronic and high-frequency equipment and
supervises network construction as well as compliance of telecommunications operators with applicable rules and regulations.

The
Communications Law requires federal regulatory agencies to encourage competition in the provision of communication services and prohibits the abuse of a dominant position to limit
competition. Presidential Decree No. 221, enacted on February 28, 1995, on Measures for Streamlining State Regulation of Prices (Tariffs), allows for the regulation of tariffs and other
commercial activities of communications companies that are "natural monopolies." Government Decree No. 637, enacted on October 24, 2005, authorized the FST to set the tariffs for the
following services provided by natural monopolies in the communication market:



Tariffs
for other services are determined by us, taking into account the cost of service and market prices. As a result, our tariffs for certain services, such as digital trunk line
leases, are used by other operators as a benchmark to set prices for their own services.

The
FAS is responsible for the encouragement and support of fair competition in the telecommunications industry. As we have a dominant position in the telecommunications market, we are
subject to anti-monopoly laws and regulations. In the event we are found to be in violation of any such law or regulation, sanctions could include confiscation for the federal budget of
profits derived from anti-competitive practices and the imposition of fines on us in the amount of up to 0.15% of the revenues derived from such anti-competitive practices (but
not exceeding 2% of our total revenues). Civil, administrative or criminal actions could also be brought against our executive officers.

As
of the date of this annual report, we are not aware of any violation of anti-monopoly laws and regulations which could lead to any such penalty.

Prior
to January 1, 2006, there was the following practice of cross-subsidies in Russia: IRCs, which provided local telephony service to their customers at below market rates,
were subsidized by DLD and ILD operations, for which IRCs were able to set above market rate tariffs. IRCs also received payments from us for traffic termination on their network at a termination
settlement rate which exceeded costs and market rate profit, and which provided IRCs with additional profit to subsidize loss-making local communications.

With
the intent of moving away from the principle of cross-subsidization during 2006, the FST established the amount of compensation surcharges for all IRCs and other significant
intra-regional operators.

We,
along with other DLD and ILD operators, are required to pay the compensation surcharge when conducting settlements for intra-regional call origination and termination services. The
amount of the compensation surcharge for each existing intra-regional operator depends on the extent to which the operator's services require subsidizing at that time and is set by the FST.

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The
introduction of compensation surcharges set by the FST on call origination services for "significant operators" has caused a substantial reduction in our portion of the tariff for
DLD and ILD services. See "Item 4. Information on the CompanyB. Business OverviewThe Telecommunications Industry in RussiaLiberalization of the Russian
Telecommunications Market" for a description of the regulatory reform of the DLD/ILD telecommunications services market and the uncertainties regarding how the liberalization program will impact our
business, financial condition and results of operations.

C.    Organizational Structure

Svyazinvest Group

We are a member of the Svyazinvest Group. As of December 31, 2006, Svyazinvest, a telecommunications holding company created by the Russian government in
1995, held a 50.67% interest in us. In turn, the Russian Ministry of Property Relations and the Russian Federal Service for Property Management held a 50% interest (plus one share) and a 25% interest
(less two shares), respectively, JSC ComstarUnited TeleSystems held a 17.31% interest (plus one share), and MGTS Finance S.A. held a 7.69% interest in Svyazinvest. See
"Item 3. Key InformationD. Risk FactorsRisks Relating to the Control of us by Svyazinvest and the Government of the Russian Federation" for a description of certain
risks relating to our ownership structure.

As
of the date of this annual report, the Russian Federal Service for Property Management held a 75% interest (less one share), JSC ComstarUnited TeleSystems held a 17.31%
interest (plus one share), and MGTS Finance S.A. held a 7.69% in Svyazinvest.

Svyazinvest
has at least a 50% interest in the following Russian entities:



Svyazinvest
has less than a 50% interest in the following Russian entities:



Rostelecom

As of the date of this annual report, the group comprised us and our consolidated subsidiaries Westelcom, GlobalTel, Globus-Telecom, Zebra Telecom, MTs NTT,
Kostars, DP Pansionat "Malakhit"and Incom, and principal associates RTComm.RU and MMTS-9. In addition, we hold interests of over 10% in 17 additional organizations, which were accounted
for using the equity method

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or
at cost since the aggregate effect of the results of operations and financial position of these companies is not material for our consolidated financial statements.

Branches

We operate through branches located throughout Russia and, as of December 31, 2006, had nine branches in Russia. Most of our branches are responsible for
providing DLD/ILD telecommunications services to end users, performing operations with, and providing services to, the IRCs and other operators, including participating in our joint projects in areas
where our facilities connect with relevant regional communications networks.

Under
Russian law, a branch functions as a division within the corporate structure of a company. Although not a legal entity distinct from the company, a branch may generally own assets,
incur liability and enter into contractual relationships. Our branches operate pursuant to internal regulations approved by our General Director, while we bear full liability for their operations.

In
order to expand our presence in the area of international organizations, we joined the ITU and opened a representative office in Geneva, Switzerland in August 1999 in order to secure
our position with international authorities and organizations, as well as promote international trade and research cooperation. In April 2002, we registered our representative office in Yerevan,
Republic of Armenia, in order to research the market and the possibilities for introducing high-level telecommunications technology into the Armenian market.

Consolidated Subsidiaries



Westelcom, a joint venture with the Russian Telecommunications Development Corporation, registered in the Russian Federation, was established in December 1992 to
contribute to the development, introduction, operation and management of the Russian telecommunications infrastructure. We acquired a 50% interest in Westelcom in 1992. In October 2002, we purchased
the remaining 50% interest in Westelcom from the Russian Telecommunications Development Corporation for U.S.$15 million. We own 100% of the voting shares in Westelcom.

Westelcom
provides communications channels and telecommunications equipment leasing services. Westelcom owns 74.0% of the charter capital of OJSC InfoTeX Taganrog Telecom, which provides
access in the Russian city of Taganrog to the PSTN, as well as local telephone network services, Internet access services, lease of communication channels and long-distance payphones.

In
May 2006, we sold our 77% interest in OJSC A-Svyaz, a subsidiary of Westelcom, which provides access to the PSTN, local telephone network services, ISDN services, Internet
access and IP telephony services, to OAO Dalsvyaz for a cash payment of RUR 10 million.



CJSC GlobalTel, a company registered in the Russian Federation, was established in 1996 to provide access to a U.S.-based global mobile satellite telephone
network. We own 51% of the voting shares in GlobalTel and GlobalStar LP, the owner of the satellite network, owns the remaining 49%. However, pursuant to the charter of GlobalTel in effect
prior to April 25, 2005, the minority shareholder had effective veto rights that prevented us from causing GlobalTel to take any significant action in the ordinary course of its business.
Because effective control of GlobalTel did not rest with us, management accounted for the investment in GlobalTel under the equity method.

On
April 25, 2005, the shareholders' meeting of GlobalTel approved a new charter abolishing the minority shareholder's veto and substantive participation rights. We concluded that
these changes

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resulted
in us having effective control over GlobalTel and we began accounting for the company as one of our subsidiaries beginning on April 25, 2005. In accordance with the provisions of
IFRS 3, "Business combinations," we accounted for taking effective control of GlobalTel under the purchase method. For U.S. GAAP purposes, obtaining control over GlobalTel was accounted
for in accordance with the transition provisions of EITF 96-16 "Investor's Accounting for an Investee when the Investor has a Majority of the Voting Interest but the Minority has
Certain Approval or Veto Rights."

GlobalStar's
satellite communications system is designed for the provision of mobile and fixed satellite communications services mainly in remote and
hard-to-reach areas where cellular and wireless communications are otherwise unavailable or underdeveloped. Its services are currently available in over 100 countries. The
Russian segment of this network is operated by GlobalTel, which provides communications services in the territories of all regions of the Russian Federation. Most of the terminals are handsets capable
of operating in and automatically switching to GSM 900 or AMPS 800 modes.

In
accordance with Russian legislation, joint stock companies must maintain a level of equity (net assets) that is greater than the charter capital. In the event that a company's net
assets, as determined under Russian accounting legislation, fall below zero, the company can be forced to liquidate. GlobalTel had, and continues to have, negative net equity as reported in its
Russian statutory financial statements. Nonetheless, we believe that the risk of statutory liquidation procedures being initiated or other material adverse actions is remote.



We established CJSC MTs NTT in 1995 in order to introduce telecommunications services based on cutting-edge technologies. As of the date of this
annual report, MTs NTT provides the following services: local telecommunications services in Moscow, ISDN and call center services, Internet access, Intelligent Network services
(e.g., Televoting and FreePhone) and videoconferencing. We own 100% of the voting shares in MTs NTT.



CJSC Globus-Telecom was established in 2000 by a group of telecommunications companies and the Federal Security Service (formerly the Federal Agency of Government
Communications and Information) in order to provide the federal authorities and certain government-determined strategic enterprises with an encrypted communications network interconnected with
the PSTN.

Globus-Telecom
is currently a fixed-line operator with a modern infrastructure enabling the provision of telecommunications services in Moscow and other regions in Russia.
Globus-Telecom has numbering capacity for 100,000 direct Moscow-code telephone numbers and its customer base mainly includes corporate users and state authorities. Through a highly
reliable and secure network, Globus-Telecom offers its customers a full package of services, including local and intra-regional telephone services, VPN, Internet access, Intelligent Network services,
data transmission and leased line services.

In
April 2006, we acquired a 74.57% stake in CJSC Globus-Telecom from CJSC Sinterra and OJSC RTC-Leasing for a cash payment of approximately RUR 821 million. In April
2006, we also acquired a 100% stake in LLC TelecomCenter, which directly controls a 20.33% stake in CJSC Globus-Telecom, from LLC AVTEX for a cash payment of approximately RUR
280.5 million. As a result, we currently own directly and indirectly a 94.92% stake in CJSC Globus-Telecom.

For
more information regarding the accounting for our acquisition of Globus-Telecom, see Notes 5 and 7 to our consolidated financial statements.

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CJSC Zebra Telecom was established in 2000 and is a universal provider of such services as Internet access and local and DLD/ILD telecommunications services using
VoIP technology and acting as an agent for licensed DLD/ILD operators. Zebra Telecom also provides Internet access and telephony services in Moscow, St. Petersburg, Nizhny Novgorod, Kazan,
Voronezh and Stavropol. Zebra Telecom provides Internet services via dial-up access using prepaid cards, as well as dedicated access. The telephony service is accessible through prepaid
scratch cards. In June 2006, we acquired a 99.99% stake in Zebra Telecom from Starford Investments Company, Ltd. for a total cash payment of approximately U.S.$13.5 million. For
information regarding the accounting for our acquisition of Zebra Telecom, see Notes 5 and 7 to our consolidated financial statements.

For
additional information, see Note 8 to our consolidated financial statements.

Principal Associates



RTComm.RU is a company registered in the Russian Federation providing integrated Internet technology solutions. RTComm.RU currently has licenses to lease out
communications channels, provide telematic and data transmission services and to engage in the technical protection of confidential information. RTComm.RU's target customers are Internet service
providers, corporate customers and government entities. We own 31.1% of the voting shares in RTComm.RU and began accounting for the results of operations and financial position of RTComm.RU under the
equity method as of January 1, 2004. Prior to that, we consolidated RTComm.RU in our financial statements on the basis of our control over the financial and operating policy decisions of
RTComm.RU through December 31, 2003. We ceased consolidating the results of RTComm.RU following our disposal of RTC-Leasing, which held a 49% interest in RTComm.RU.

One
of the principal services that RTComm.RU has been providing since 2001 is dedicated Internet access, which provides a 24-hour connection of the customer's router to a
port of the RTComm.RU network node and permanent access to Internet resources. RTComm.RU also provides
data center services, including registration of domain names, "post-office" services, news server services, virtual hosting, co-location and dedicated hosting,
among others.

RTComm.RU
owns 100% of CJSC RTComm-Sibir and LLC RTComm-Yug and 51% of LLC BASHRTCOMM, each of which is a regional Internet service provider. It also owns nodes
in London and Stockholm and data centers in Moscow, Novosibirsk and Rostov-on-Don. In the domestic market, RTComm.RU provides services to more than 1,000 business customers,
including to communications operators, national corporations and federal ministries and agencies located in more than 160 large cities in Russia where RTComm.RU's principal access nodes
are located.



MMTS-9 is a company registered in the Russian Federation primarily engaged in renting premises to mobile and fixed-line telecommunications
providers for the installation of their telecommunications equipment and the provision of interconnection services and call center services. We own 49.1% of the voting shares in MMTS-9.
The majority of Russian Internet sites are hosted on servers located on the premises of MMTS-9.

D.    Property, Plant and Equipment

Our principal facilities and properties consist of buildings, sites and telecommunications facilities such as switches of various capacities, cable and
transmission devices, television and radio broadcasting equipment, transportation vehicles and various other equipment located throughout Russia. See

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"Item 4.
Information on the CompanyB. Business OverviewNetwork and Facilities" for additional information.

We
own the building in which our headquarters are located at 14, 1st Tverskaya-Yamskaya St., 125047 Moscow, Russia. We also own and lease offices and operational facilities
throughout Russia related to the operation of our business. The location of our principal property, plant and equipment are described in "Item 4. Information on the CompanyA.
History and Development" and "B. Business Overview." Our major offices are located in the destination cities of our
primary network in Russia, including in Moscow, St. Petersburg, Novosibirsk, Ekaterinburg, Samara, Rostov-on-Don and Khabarovsk.

Our
management believes that our facilities are adequate for our present needs.

Fixed Assets

The table below shows the value of fixed assets owned by us as of December 31, 2006, 2005 and 2004. Values are expressed in millions of rubles, according
to net book values under IFRS. See Notes 6 and 33 to our consolidated financial statements for a description of the differences in the valuation of property, plant and equipment under
IFRS and U.S. GAAP.

|                                |  | December 31,
|------------------------------- |  | ------------
|
|Buildings and sites             |  | 5,562       
|Cables and transmission devices |  | 17,774      
|Other                           |  | 7,693       
|                                |  |             
|Total(1)                        |  | 31,029      
|                                |  |             

---

Capital expenditures approved by the Board of Directors for 2007 are expected to be RUR 5,368 million. See "Item 4.
Information on the CompanyA. History and Development."

Construction
in progress as of December 31, 2006, 2005 and 2004 amounted to RUR 8,157, RUR 6,653 million and RUR 4,313 million, respectively.

Environmental Compliance

We believe that we are in compliance with all material requirements relating to environmental protection. Under various construction agreements to which we are a
party, we assume obligations to the state and/or local authorities to effect payments to cover costs for the regeneration of forests, agricultural lands and other properties. In particular, we have a
legal obligation to gradually discontinue using analog and trunk lines and equipments and to restore certain sites. We estimate the present value of such obligations to be approximately RUR
104 million.

Item 4A.Unresolved Staff Comments

None.

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Item 5.Operating and Financial Review and Prospects

A.    Operating Results

The following discussion of our financial position and results of operations should be read in conjunction with our consolidated financial
statements and the notes to our consolidated financial statements included elsewhere in this annual report.

The accompanying consolidated financial statements have been prepared in accordance and comply with IFRS, which differs in certain respects from U.S. GAAP.
For a discussion of the differences between IFRS and U.S. GAAP insofar as they relate to us, see Note 33 to our consolidated financial statements.

Overview

Our principal sources of income are revenues generated from the provision of DLD and ILD services provided to fixed-line subscribers throughout
Russia. We also render DLD and ILD traffic throughput services to Russian operators throughout Russia, including to each of Russia's seven IRCs, as well as to alternative operators and mobile
operators. In addition, we provide telecommunications services to various government-funded entities and government ministries across Russia and ensure the operation of the ground-based network of
most television and radio broadcasting channels.

Reform
of the Russian telecommunications industry began with the introduction of the Communications Law in 2004, and has intensified as implementing regulations have been enacted
thereunder. In particular, several regulations were enacted in 2005 and 2006 that directly impact the DLD/ILD telecommunications services market in Russia and ultimately led to the restructuring and
liberalization of this market. Most significantly, new regulations enacted in 2005 pursuant to the Communications Law allow telecommunications operators to apply for DLD/ILD telecommunications
services licenses and radically restructured our relationships with IRCs, local operators and subscribers starting from January 1, 2006. Prior to that date, we were the only nationwide carrier
of wholesale long-distance and international traffic in Russia and, therefore, held a monopolistic position in this market. Local operators, including IRCs, billed their own local
customers for outgoing
domestic long-distance and international calls, while we billed the operators for the traffic throughput. Our arrangement in Moscow was different, as we provided domestic
long-distance and international telecommunications services to end users through the local access network of a local operator and billed customers directly. We also had the exclusive right
to terminate incoming international voice traffic from international operators. Starting January 1, 2006, international operators may terminate incoming ILD traffic on our telecommunications
network as well as on networks of other long-distance telecommunications operators. Currently, international operators pay us for termination of incoming ILD traffic to Russia at a
pre-agreed rate per minute.

In
accordance with the new regulations enacted under the Communications Law, the principles governing the relationship between providers of long-distance telecommunications
services to end users have changed dramatically. Operators of DLD and ILD telephone networks, or long-distance operators, must now provide long-distance services to
subscribers of local telephone network operators directly, while operators of intra-regional telephone networks provide long-distance operators with intra-regional call origination
and termination services and operators of local telephone networks provide intra-regional telephone network operators with local call origination and termination services. Settlements between
operators are to be conducted in the order of the services rendered. Subscriber billing and collection activities and other customer services are to be performed by the long-distance
operators or their agents. As a result, we currently provide DLD/ILD services directly to end users throughout the Russian Federation.

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The
following table sets forth the percentage of our revenue derived from domestic long-distance and international traffic for 2006, 2005 and 2004.

|                                                                    |  | Percentages of total revenue represented by domestic long-distance and international traffic
|------------------------------------------------------------------- |  | --------------------------------------------------------------------------------------------
|
|
|Outgoing international long-distance traffic                        |  | 22%                                                                                         
|Incoming and transit international long-distance traffic            |  | 7%                                                                                          
|Domestic long-distance traffic                                      |  | 51%                                                                                         
|                                                                    |  |                                                                                             
|Total revenue from domestic and international long-distance traffic |  | 80%                                                                                         
|                                                                    |  |                                                                                             

We own and operate our network and the international gateways through which a large portion of Russia's DLD and ILD traffic passes. Our network
connects all of the IRCs in Russia which, in turn, own and operate local telephone networks in their respective areas. We bill subscribers for outgoing domestic long-distance and
international calls directly, in some cases, and jointly with local operators acting as our agents, in others. In exchange for their services, we pay certain commissions to our agents.

Historically,
growth in the volume of international traffic was limited due to Soviet-era capacity constraints on the Russian telecommunications network. However, in recent
years, we have made significant investments to improve channel capacity for international calls and to enhance interconnections with international operators.

For
a description of our DLD and ILD tariffs, see "Item 4. Information on the CompanyB. Business OverviewServices."

We
have in the past experienced, and continue to experience, significant delays in payment from subscribers located in Moscow, certain government-funded entities, government bodies and
agencies, as well as some international operators. Our management believes that appropriate allowances for doubtful accounts receivable were established to cover our potential exposure. See
"Item 3. Key InformationD. Risk FactorsRisks Relating to Our BusinessWe face risks resulting from significant delays in the collection of receivables."

Critical Accounting Policies

The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements prepared in accordance with
IFRS. Our reported financial condition and results of operations are sensitive to the accounting methods, assumptions and estimates generally underlying the preparation of financial statements. Our
management has identified certain critical accounting policies which require them to make significant estimates and assumptions. We base our estimates on historical experience and on various other
assumptions that we believe are reasonable under the circumstances. These results and assumptions form the basis for making judgments about the carrying values of assets and liabilities not readily
apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

Accounting
for the effects of inflation and changes in foreign exchange rates has also been included by management as a critical accounting policy because of the material impact on our
financial statements for the years 2000-2002. Management believes that some of the most critical accounting policies currently affecting our financial condition and results of operations
are as follows.

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Our group is comprised of Rostelecom and its subsidiaries. Transactions and balances between Rostelecom and its subsidiaries are eliminated, and accounting
policies of the subsidiaries are adjusted to conform to Rostelecom's accounting policies.

A
consolidated subsidiary is an entity that is controlled by us, either through ownership, directly or indirectly, of more than 50% of the voting share capital of such entity, or by
other means. Companies where we own more than 50% of the voting share capital but the minority shareholder enjoys substantive participation rights and has effective veto rights that would prevent us
from taking decisions that are significant in the ordinary course of business,i.e., we are unable to exercise control, are accounted for under the
equity method. Subsidiaries are consolidated from the date on which control is transferred to us, and are no longer consolidated from the date that we cease to have control over the subsidiary.

As
of December 31, 2006, our group comprised Rostelecom and its consolidated subsidiaries, Westelcom, GlobalTel, Globus-Telecom, Zebra Telecom, MTs NTT, Kostars, DP Pansionat
"Malakhit" and Incom. In 2006, we acquired Globus-Telecom and Zebra Telecom.

As
of December 31, 2005, the group comprised Rostelecom and its consolidated subsidiaries, Westelcom, GlobalTel and MTs NTT. As of December 31, 2004, the group comprised
Rostelecom and its consolidated subsidiaries, Westelcom and MTs NTT.

For
more information, see "Item 4. Information on the CompanyA. History and Development" and our consolidated financial statements included elsewhere in this
annual report."

Associates
in which we have significant influence but not a controlling interest are accounted for using the equity method of accounting. Significant influence is usually demonstrated by
our ownership, directly or indirectly, of between 20% and 50% of the voting ownership interest or by power to participate in the financial and operating policy decisions of associates. Our share of
the net income or losses of associates is included in our consolidated statement of income, our share of movement in reserves of associates is recognized in reserves and our share of the net assets of
associates is included in our consolidated balance sheet. An assessment of investments in associates is performed when there is an indication that the asset has been impaired or the impairment losses
recognized in prior years no longer exist. When our share of losses exceeds the carrying amount of the investment in an associate, the investment is reported at nil value and recognition of losses is
discontinued, except to the extent of our commitment to fund future losses. Unrealized profits that arise from transactions between us and our associates are eliminated in proportion to our share in
such associates, and unrealized losses are excluded in proportion to our share in such associates, if there is no evidence of indicators of impairment of an asset transferred. Our management must
exercise judgment in determining whether a potential impairment of an investment has occurred. For the purposes of such assessment, management uses information relating to the fair value of the
investment rather than to its carrying value, information relating to the financial condition of the investee company, as well as other known factors which may have an impact on the carrying value of
the investment in the near future.

If
our interest in an entity is between 20% to 50% and such interest is acquired with the intention to sell it in the foreseeable future, such investment is accounted for as investment
available-for-sale and is stated at the fair value. Determination of the fair value of assets is subjective by nature and often involves the use of significant estimates and
assumptions. Management has, in the past, engaged independent appraisers to assist in the determination of the fair value of certain available-for-sale investments. The most
significant estimates and assumptions used to determine fair value relate, among others, to the estimation of the amount and timing of future cash flows and then discount rates and perpetual growth
rates. Most of the assumptions are based on available historical and market information.

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Our interest in jointly controlled entities, or joint ventures, is accounted for using the equity method of accounting for as long as we have joint control over the joint venture. When
we contribute or sell assets to the joint venture, any gain or loss from the transaction is recognized by us based on the substance of the transaction. When we purchase assets from the joint venture,
we do not recognize our share of the profit from the transaction until we resell the assets to an independent party.

Prior
to October 2003, we owned 27.13% of the voting shares of RTC-Leasing. However, as management believed that it exercised control over the management, policies and
day-to-day operations of RTC-Leasing, including the right to appoint a majority of the Board of Directors of RTC-Leasing, we continued to consolidate
the results of operations and financial position of RTC-Leasing. In October 2003, we sold our remaining equity interest in RTC-Leasing and effectively lost control as of
December 1, 2003. As a result, RTC-Leasing, together with its subsidiaries, ceased to be treated as a consolidated entity for the purposes of our financial statements. For
additional information, see "Item 10. Additional InformationC. Material Contracts."

As
of December 31, 2006, we held 31.1% of the voting shares of RTComm.RU. We consolidated RTComm.RU in our financial statements on the basis of our control over the financial and
operating policy decisions of RTComm.RU through December 31, 2003. However, following our disposal of RTC-Leasing, which held a 49% interest in RTComm.RU, we ceased consolidating
the results of RTComm.RU and began accounting for the results of operations and financial position of RTComm.RU under the equity method as of January 1, 2004.

In
addition, we held 51% of the voting shares of GlobalTel as of December 31, 2004. As GlobalTel was a joint venture under common control, and its minority shareholder had
substantive participation rights which enabled them to veto decisions by the majority shareholder, we accounted for GlobalTel under the equity method in 2004 and 2003. The shareholders' meeting of
GlobalTel held on April 25, 2005, however, approved a new charter abolishing minority shareholder's substantive participation and veto rights. We determined that these changes resulted in
obtaining effective control over GlobalTel and, thus, GlobalTel should be considered our subsidiary rather than a joint venture. Consequently, the results of operations and financial position of
GlobalTel were consolidated in our financial statements in accordance with IAS No. 27, "Consolidated Financial Statements and Accounting for Investments in Subsidiaries" beginning from
April 25, 2005.

Obtaining
control over GlobalTel was accounted for using the purchase method, in accordance with the provisions of IFRS 3, "Business Combinations." Accordingly, the results of
operations and financial position of GlobalTel were consolidated by us beginning from April 25, 2005.

In
April 2006, we acquired a 74.58% stake in CJSC Globus-Telecom from CJSC Sinterra (formerly CJSC Alsean-N) and OJSC RTC-Leasing for a cash payment of
approximately RUR 821 million. In April 2006, we also acquired a 100% stake in LLC TelecomCenter, which directly controls a 20.34% stake in CJSC Globus-Telecom, from LLC AVTEX for
a cash payment of approximately RUR 280.5 million. As a result, we currently own, directly and indirectly, a 94.92% stake in CJSC Globus-Telecom. Our costs relating to the
acquisition of CJSC Globus-Telecom, including transaction costs, amounted to RUR 1,123 million.

In
June 2006, we acquired a 99.99% stake in CJSC Zebra-Telecom from Starford Investments Company, Ltd. for a total cash payment of approximately RUR 374 million.

The
acquisitions of Globus-Telecom and Zebra Telecom were accounted for using the purchase method, in accordance with provisions of IFRS 3, "Business combinations." Accordingly,
the results of operations and financial position of Globus-Telecom and Zebra Telecom were consolidated by us from their dates of acquisition.

For
additional information, see Notes 5, 8 and 33 to our consolidated financial statements.

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Property, plant and equipment is stated at cost less accumulated depreciation and any impairment in value. The cost of the network comprises all expenditures up
to and including the cabling and wiring to the local telephone operator's intercity exchange, and includes contractors' charges and payments on account, materials, direct labor and interest costs on
specific project financing up to the date of commissioning of the relevant assets.

Subsequent
expenditures are capitalized if it can be clearly demonstrated that they extend the life of the asset or significantly increase its revenue generating capacity beyond its
originally assessed standard of performance. Expenditures for continuing repairs and maintenance are charged to the statement of income as incurred. Social assets are expensed on acquisition.

Items
of property, plant and equipment that are retired or otherwise disposed of are eliminated from the balance sheet along with the corresponding accumulated depreciation. Any gain or
loss resulting from such retirement or disposal is included in the determination of net income.

Depreciation
is calculated on property, plant and equipment on a straight-line basis from the time the assets are available for use, over their estimated useful lives
as follows:

|                                |                                             | Number of years
(as of
December 31,
2006)
|------------------------------- | ------------------------------------------- | -----------------------------------------
|Buildings and site services     |                                             | 1050                                    
|Cable and transmission devices: |                                             |                                          
|                                | Channels                                    |                                          
|                                | Cable                                       |                                          
|                                | Radio and fixed link transmission equipment |                                          
|                                | Telephone exchanges                         |                                          
|Other                           |                                             | 510                                     

The useful life of an asset encompasses the entire time it is available for use, regardless of whether during that time it is in use or is idle.
The useful lives and residual value of assets and methods are reviewed at each financial year-end and, if expectations differ from previous estimates, the changes are accounted for on a
prospective basis. For more information, see Note 6 to our consolidated financial statements. Depreciation of an asset ceases at the earlier of the date the asset is classified as held
for sale and the date the asset is derecognized.

At
each balance sheet date, an assessment is made as to whether there is any indication that the group's assets may be impaired. If any such indication exists, an assessment is made to
establish whether the recoverable amount of the assets has declined below the carrying amount of those assets as disclosed in the financial statements. When such a decline has occurred, the carrying
amount of the assets is reduced to the recoverable amount. The amount of any such reduction is recognized
immediately as an expense in the statement of income. Any subsequent increase in the recoverable amount of the assets are reversed when the circumstances that led to the write-down or
write-off cease to exist and there is persuasive evidence that the new circumstances and events will persist for the foreseeable future. Increase of the recoverable amount is limited to
the lower of its recoverable amount and carrying amount that would have been determined had no impairment loss been recognized for the asset in prior years.

The
recoverable amount is determined as the higher of the asset's fair value less cost to sell, or value in use. The value in use of the asset is estimated based on forecast of future
cash inflows and outflows to be derived from continued use of the asset and from the estimated net proceeds on disposal, discounted to present value using an appropriate discount rate.

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The
determination of impairment of property, plant and equipment involves the use of estimates that include, but are not limited to, the cause, timing and amount of the impairment.
Impairment is based on a large number of factors, such as changes in current competitive conditions, expectations of growth in the telecommunications industry, increased cost of capital, changes in
the future availability of financing, technological obsolescence, discontinuance of service, current replacement costs and other changes in circumstances that indicate an impairment exists. The
recoverable amount and the fair values are typically determined using a discounted cash flow method which incorporates reasonable market participant assumptions. The identification of impairment
indicators, the estimation of future cash flows and the determination of fair values for assets (or group of assets) requires management to make significant judgments concerning the identification and
validation of impairment indicators, expected cash flows, applicable discount rates, useful lives and residual values. Methods used to determine the value in use include discounted cash
flow-based methods and methods that use quoted stock market prices as a basis. These estimates, including the methodologies used, can have a material impact on the fair value and
ultimately the amount of any property, plant and equipment impairment.

As
discussed in Note 3 to our consolidated financial statements, as part of the regulatory reform and restructuring of the national telecommunications industry aimed to
facilitate competition and make the industry more attractive for investors, in 2005, the Ministry of Telecommunications issued a number of new rules and regulations that resulted in a change of our
status as a monopoly supplier of long distance and international communications effective January 1, 2006. As of December 31, 2005, we performed an assessment of the impact of the new
rules and regulations on our business and results of operations, which resulted in a RUR 4,970 million impairment loss recognized in the statement of income for the year ended
December 31, 2005 related to a write-down of certain property, plant and equipment of RUR 4,961 million and goodwill of RUR 9 million to the recoverable amount. The
recoverable amount was based on value in use and was determined at the cash-generating unit level. The cash-generating unit consists of Rostelecom, Westelcom and MTs NTT.
Impairment analysis was performed based on the value in use as fair value less the cost to sell cannot be reliably determined. In determining value in use for the cash-generating unit, the
cash flows were discounted at a rate of 16.65% on a pre-tax basis and cash flows beyond the five-year period were
extrapolated using a 5% growth rate. For more information, see Note 6 to our consolidated financial statements.

For
the purpose of determining the opening balances on the first application of IFRS at January 1, 1994, we performed a valuation of the property, plant and equipment, as reliable
historical cost information and information regarding acquisition dates was not available. These values were used as deemed cost. A brief description of the methodology applied in performing this
valuation is set out below for each major asset category:



Construction
in progress represents properties under construction and is stated at cost. This includes cost of construction, plant and equipment and other direct costs. Construction in
progress is not depreciated until the constructed or installed asset is ready for its intended use.

Interest
costs on borrowings to finance the construction of property, plant and equipment are capitalized during the period of time that is required to complete and prepare the asset for
its intended use. All other borrowing costs are expensed.

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Intangible assets acquired separately are measured on initial recognition at cost. The cost of intangible assets acquired in a business combination is fair value
as at the date of acquisition. Following initial recognition, intangible assets are carried at cost less any accumulated amortization and any accumulated impairment losses. The useful lives of
intangible assets are assessed to be either finite or indefinite.

Intangible
assets with finite lives are amortized over the useful economic life and assessed for impairment whether there is an indication that the intangible asset may be impaired.
Amortization periods and methods for intangible assets with finite useful lives are reviewed at least at each financial year-end and, if expectations differ from pervious estimates, the
changes are accounted for as changes in accounting estimates. Changes in the expected useful life or the expected pattern of consumption of future economic benefits embodied in the asset is accounted
for by changing the amortization period or method, as appropriate, and treated as changes in accounting estimates. The amortization expense on intangible assets with finite lives is included in
depreciation and amortization expenses in our consolidated statements of income.

Intangible
assets with indefinite useful lives are not amortized, but tested for impairment annually or more frequently when indicators of impairment exist, either individually or at the
cash-generating unit level. The useful life of an intangible asset with an indefinite life is reviewed annually to determine whether indefinite life assessment continues to be supportable.
If not, the change in the useful life assessment from indefinite to finite is made on a prospective basis.



Goodwill represents the excess of the cost of acquisition over the net fair value of our share of the identifiable assets, liabilities and contingent liabilities
of the acquired subsidiary or associate at the date of acquisition. Goodwill on an acquisition of a subsidiary is included in intangible assets. Goodwill on an acquisition of an associate is included
in the investments in associate. Following initial recognition, goodwill is measured at cost less any accumulated impairment losses.

Goodwill
is not amortized. Instead it is tested for impairment annually or more frequently if events or changes in circumstances indicate that it might be impaired. For the purposes of
impairment testing, goodwill acquired in a business combination is, from the acquisition date allocated to each of the cash-generating units or groups of cash-generating units
expected to benefit from the combination's synergies, irrespective of whether other assets and liabilities of ours are assigned to those units or group of units.

Impairment
is determined by assessing the recoverable amount of the cash-generating unit, to which the goodwill relates. Where recoverable amount of the
cash-generating unit is less than the carrying amount, an impairment loss is recognized. Where goodwill forms part of a cash-generating unit and part of the operations within
that unit are disposed of, the goodwill associated with the operation disposed of is included in the carrying amount of the operation when determining the gain or loss on disposal of the operation.
Goodwill disposed of in this circumstance is measured based on the relative values of the operation disposed of and the portion of cash-generating unit retained.

As
of the reporting date, we estimated the value in use of cash-generating units to be higher than the carrying amount of their net assets, including goodwill. Thus, no
impairment losses were recognized as of December 31, 2006.



Finance leases, which transfer to us substantially all the risks and benefits incidental to ownership of the leased item, are capitalized at the commencement of
the lease term at the fair value of the

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leased
property or, if lower, at the present value of the minimum lease payments. Lease payments are apportioned between the finance charges and the reduction of the lease liability so as to achieve a
constant rate of interest on the remaining balance of the liability. Finance charges are charged directly against income. Capitalized leased assets are depreciated on a straight-line basis
over the shorter of the estimated useful life of the assets and the lease term unless there is a reasonable certainty that we will obtain ownership by the end of the lease term, in which case the
assets are depreciated over their estimated useful lives.

Indefeasible
Rights of Use (IRU) represent the right to use a portion of the capacity of a terrestrial or submarine transmission cable granted for a fixed period. IRUs are recognized as
an asset when we have the specific indefeasible right to use an identified portion of the underlying asset, generally optical fibers or dedicated wavelength bandwidth, and the duration of the right is
for the major part of the underlying asset's economic life. Such assets are included in property, plant and equipment in our consolidated balance sheets. They are depreciated over the shorter of the
expected period of use and the life of the contract.

Leases
where the lessor retains substantially all the risks and benefits of ownership of the asset are classified as operating leases. Operating lease payments are recognized as an
expense in the income statement on a straight-line basis over the lease term.



Prior to December 31, 2002, the Russian Federation met the definition of a hyperinflationary economy as defined by International Accounting Standard 29
("IAS 29"), "Financial Reporting in Hyperinflationary Economies." Although the cumulative inflation index for the three-year period ended December 31, 2002 was less than
100%, it was considered that the remaining criteria set forth by IAS 29 indicated that during 2002, the Russian Federation continued to experience conditions that met the definition of a
hyperinflationary economy.

Effective
January 1, 2003, the International Task Force of the American Institute of Certified Public Accountants determined that the Russian Federation no longer meets the
criteria of a hyperinflationary economy. Beginning in 2003, we ceased applying IAS 29 and only recognize the cumulative impact of inflation indexing through December 31, 2002 on
non-monetary elements of our consolidated financial statements. Transactions undertaken subsequent to December 31, 2002 are reported at actual, nominal amounts except for those
involving non-monetary assets and liabilities acquired prior to January 1, 2003. Results of operations (including gains and losses on disposal) involving such assets and liabilities
are recognized based on the restated cost, which was calculated by applying to the carrying values of these assets and liabilities the change in the general price index through December 31,
2002. Comparative financial information for the year ended December 31, 2002 is presented in terms of the measuring unit current as of December 31, 2002.

IAS 29
requires that financial statements prepared by companies in hyperinflationary economies on a historical cost basis be adjusted to take account of the effects of inflation.
Our consolidated financial statements for the years ended December 31, 2000, 2001 and 2002, have been restated in terms of the purchasing power of the measuring unit as of December 31,
2002, and the net gains or losses arising on the net monetary position of assets and liabilities during the periods presented have been included in the statement of operations and disclosed
separately. We have utilized the General Price Index ("GPI") as issued by the Federal Service of Public Statistics, in the application of IAS 29.

Substantially
all of our revenue is denominated in rubles, except for revenue from international operators, which is denominated in U.S. dollars or other foreign currencies. Most of our
costs, other than payments to other international operators and certain domestic service providers, telecommunications equipment purchases and interest paid on foreign denominated debt, are
denominated in rubles. Therefore, our performance results from international traffic and, accordingly,

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year-to-year
comparisons of our incoming international traffic revenues, are significantly affected by the relative movements of domestic inflation and ruble exchange rates.
For example, if foreign currency international incoming traffic revenues for any periods being compared remain at the same level but between the periods the rate of devaluation of the ruble is slower
than the rate of Russian inflation, the related revenues expressed in constant rubles decline from one period to the next. Conversely, if the rate of devaluation exceeds the rate of inflation, such
revenues expressed in constant rubles increase from one period to the next. During 1998, the ruble devaluation rate exceeded the rate of inflation, while in the period from 1999 to 2002, it was less
than the rate of inflation. Currently, we do not utilize financial instruments to hedge against such foreign currency fluctuations.

The
following table illustrates the effects from 1998 to 2002 of both exchange rate changes and the indexation of historical amounts to adjust for Russian inflation on a fixed amount of
U.S. dollar revenues:

|Payment date      |  | U.S.$ amount of payment |  | Rubles to U.S.$ exchange rate at time of payment |  | Rubles amount initially recognized |  | Decrease in value of Rubles against U.S.$ from payment date to December 31, 2002 |   | Increase in GPI from payment date to December 31, 2002 |   | Amount in constant Rubles in terms of purchasing power as of December 31, 2002
|----------------- |  | ----------------------- |  | ------------------------------------------------ |  | ---------------------------------- |  | -------------------------------------------------------------------------------- | - | ------------------------------------------------------ | - | ------------------------------------------------------------------------------
|January 1, 1998   |  | 100                     |  | 5.96                                             |  | 596                                |  | 433                                                                              | % | 315.2                                                  | % | 2,475                                                                         
|December 31, 1998 |  | 100                     |  | 20.65                                            |  | 2,065                              |  | 54                                                                               | % | 124.6                                                  | % | 4,639                                                                         
|December 31, 1999 |  | 100                     |  | 27.00                                            |  | 2,700                              |  | 18                                                                               | % | 64.3                                                   | % | 4,437                                                                         
|December 31, 2000 |  | 100                     |  | 28.16                                            |  | 2,816                              |  | 13                                                                               | % | 36.8                                                   | % | 3,852                                                                         
|December 31, 2001 |  | 100                     |  | 30.14                                            |  | 3,014                              |  | 5                                                                                | % | 15.1                                                   | % | 3,470                                                                         
|December 31, 2002 |  | 100                     |  | 31.78                                            |  | 3,178                              |  |                                                                                 |   |                                                       |   | 3,178                                                                         

The following table summarizes the annual rate of inflation for the years ended December 31, 2006, 2005, 2004, 2003 and 2002:

|For the years ended December 31 |  | Annual inflation
|------------------------------- |  | ----------------
|2006                            |  | 9.0%            
|2005                            |  | 10.9%           
|2004                            |  | 11.7%           
|2003                            |  | 12.0%           
|2002                            |  | 15.1%           

---

Source: Rosstat.



Revenue and operating costs for all services supplied and received are recognized at the time the services are rendered. Revenue is recognized when it is probable
that the economic benefits associated with the transaction will flow to the enterprise and the amount of revenue can be reliably measured. Revenues and expenses are reported net of respective value
added tax.

Prior
to 2006, we charged and paid to regional local telephone operators and other telecommunications service providers in Russia either an agreed proportion of the amounts they billed
to their subscribers or an agreed settlement rate based on traffic minutes. For outgoing domestic telephone traffic originating in Moscow, subscribers were charged directly by us based on
pre-set per minute tariffs regulated by the FST.

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Effective
from January 1, 2006, as a result of regulatory reform in the telecommunications industry, new regulations and rules were implemented that changed principles of
interaction between us, local operators and end users in providing long-distance services. The introduction of the new settlement system represents a change in business practice resulting
in new accounting for changed practice. Therefore, starting from January 1, 2006, we charge all of our subscribers throughout Russia for outgoing domestic telephone traffic based on
pre-set per minute tariffs regulated by the FST. We are charged by regional local operators for originating and terminating calls. We also incurs agent fees in connection with the service
contracts concluded with regional local operators.

We
charge amounts from foreign network operators for incoming and transit of international calls and other traffic that originated outside Russia. We are charged by foreign operators for
termination of outgoing international calls. These revenues and costs are shown in our consolidated financial statements.

Amounts
payable to and receivable from the same operators are shown net in the balance sheet where a legal right of offset exists and there is intention either to settle on a net basis,
or to realize the asset and settle the liability simultaneously.



Historically, we operated in the following three segments: (i) telecommunications services, (ii) leasing services and (iii) banking and
investment activities. Effective December 1, 2003, we discontinued our leasing and banking and investment services and chose to focus on our primary business area, which is the provision of
telecommunications services, including international and domestic long-distance phone calls and Internet-related services.

Approximately
95% of our revenues are derived from telecommunications services. Revenues from telecommunications services are reported according to the types of services provided. In the
opinion of
management, this is the most relevant presentation of revenues generated from our telecommunications services. We determined the following types of material services provided:



The
regulatory reform of the Russian telecommunications industry, which came into effect on January 1, 2006 and introduced a new scheme governing the relationships between the
telecommunications operators providing DLD/ILD services and end users, has significantly altered our customer base. Under the new scheme, we began providing our DLD/ILD services directly to end users
and billed them for such services. Therefore, in 2006, the majority of our revenues were derived

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directly
from end users and, as a result, we had to adjust our presentation of revenues generated from the telecommunications services. Prior to January 1, 2006, we used the following
presentation of our revenues:







For additional information, see Note 3 to our consolidated financial statements.



We analyze our accounts receivable for recoverability on a regular basis. The allowance estimation process requires management to make assumptions based on the
historical results, future expectations, assessment of the general economic environment and changes in the creditworthiness of our debtors. Such estimates and assumptions may have a significant impact
on the carrying value of the accounts receivable and on the amount of bad debt expense. The percentage of general allowance is based on types of customers, history of debt collection per customer type
and age of debt. Specific allowance is established based on the analysis of significant debtors on an individual basis. Historically, the major part of allowance for doubtful accounts relates to
accounts receivable from subscribers in Moscow.

We
use the same pattern to record the allowance for doubtful accounts as of December 31, 2006 as was used for doubtful accounts as of December 31, 2005. The allowance for
doubtful accounts as of December 31, 2006, increased compared to December 31, 2005, primarily due to the introduction of new regulations governing the telecommunications industry which
resulted in a significant change in the structure of our accounts receivable. The rate of collection of accounts receivable from end users under the new scheme is lower than that from IRCs and other
local operators under the scheme effective prior to January 1, 2006.

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We have entered into a number of related party transactions. See Note 27 to our consolidated financial statements and "Item 7.
Major Shareholders and Related Party TransactionsB. Related Party Transactions."



Revenues

In 2006, total revenues increased by 50.3% to RUR 61,559 million from RUR 40,955 million in 2005. The increase in total revenues was largely due to
regulatory changes in the telecommunications industry since January 1, 2006 introducing the new scheme of settlements described above. We had a corresponding increase in our expenses. See
Note 3 to our consolidated financial statements.

Prior
to 2006, we charged several regional and local telecommunications operators for long-distance throughput and termination services (except for Moscow), while we were
charged by regional and local telecommunications operators for termination of long-distance calls. In Moscow, we provided services through the local access network of a local operator and
billed subscribers directly.

Currently,
we provide DLD/ILD services to all of our end users throughout Russia and bill them directly. Regional and local telecommunications operators charge us for origination and
termination of long-distance calls. Besides, we pay compensation surcharge to the significant telecommunications operators. For more information, see Note 3 to our
consolidated financial statements.

Other
factors that contributed to the increase in revenues include the strengthening of partnerships with other Russian operators and our focus on new market opportunities available
through the provision of telecommunications services directly to end users.

Telephone traffic

|                                                         |  | Year ended December 31, |  | Change
|-------------------------------------------------------- |  | ----------------------- |  | ------
|
|
|Domestic long-distance traffic                           |  | 31,370                  |  | 18,126
|Outgoing international long-distance traffic             |  | 13,271                  |  | 9,405 
|Incoming and transit international long-distance traffic |  | 4,480                   |  | 4,098 
|                                                         |  |                         |  |       
|Total revenues from telephone traffic                    |  | 49,121                  |  | 31,629
|                                                         |  |                         |  |       

Revenues from telephone traffic, which include revenues from DLD traffic, outgoing ILD traffic and incoming ILD traffic, represented 79.7% and
77.2% of total revenues in 2006 and 2005, respectively.

Revenues
from DLD services increased by 73.1% to RUR 31,370 million in 2006 compared to RUR 18,126 million in 2005. This increase was primarily a result of the transition
to the new settlement scheme implemented in 2006, as described above.

Our
volume of DLD traffic amounted to 9,722 million minutes representing a 4% increase from 9,347 million minutes in 2005 due to an increase in demand for
DLD services.

Revenues
from outgoing ILD services increased by 41.1% to RUR 13,271 million in 2006 from RUR 9,405 million in 2005 mainly driven by the transition to the new settlement
scheme implemented in 2006, as described above. The volume of ILD traffic from Russian subscribers and operators on our

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network
totaled to 1,933 million minutes, an increase of 9.2% from 1,769.3 million minutes in 2005 due to an increase in demand for ILD services.

Revenue
from incoming and transit ILD services grew by 9.3% to RUR 4,480 million in 2006 compared to RUR 4,098 million in 2005 primarily due to a 31.2% increase in the
volume of incoming traffic from international operators passing through our network to 2,461 million minutes in 2006 from 1,875 million minutes in 2005 resulted from an increase in
demand and a decrease in tariffs.

The
acquisitions of CJSC Globus-Telecom and CJSC Zebra Telecom have not significantly affected the composition of our revenues. See Note 5 to our consolidated financial
statements.

Rent of channels

|                                     |  | Year ended December 31, |  | Change
|------------------------------------ |  | ----------------------- |  | ------
|
|
|Total revenues from rent of channels |  | 7,116                   |  | 6,045 

Revenues from rent of channels represented 11.6% of total revenues in 2006 compared to 14.8% in 2005. Our revenues from rent of channels increased
by 17.7% to RUR 7,116 million in 2006 from RUR 6,045 million in 2005. This increase was primarily driven by the growing demand for leased line services from operators
and businesses.

Other revenues

|                                  |  | Year ended December 31, |  | Change
|--------------------------------- |  | ----------------------- |  | ------
|
|
|Television and radio transmission |  | 528                     |  | 574   
|Satellite services                |  | 559                     |  | 548   
|Internet access                   |  | 217                     |  | 44    
|FreePhone services                |  | 761                     |  | 430   
|Miscellaneous revenue             |  | 3,257                   |  | 1,685 
|                                  |  |                         |  |       
|Total other revenue               |  | 5,322                   |  | 3,281 
|                                  |  |                         |  |       

In 2006, other revenues represented 8.6% of our total revenues compared to 8.0% in 2005. The other revenues increased by 62.2% to RUR 5,322 in
2006 from RUR 3,281 in 2005 due to (a) revenue for local telecommunications services primarily provided by our consolidated subsidiaries, (b) the growth in demand for interconnection and
technical support services, and (c) development and promotion of new services and value-added services by us such as Internet access and FreePhone.

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Operating Expenses

|                                                         |  | Year ended December 31, |  | Change
|-------------------------------------------------------- |  | ----------------------- |  | ------
|
|
|Wages, salaries, other benefits and payroll taxes        |  | 7,147                   |  | 6,242 
|Depreciation and amortization                            |  | 8,418                   |  | 7,136 
|Impairment of property, plant and equipment and goodwill |  |                        |  | 4,970 
|Charges by network operatorsinternational               |  | 7,304                   |  | 7,059 
|Charges by network operatorsnational                    |  | 29,355                  |  | 8,741 
|Administration and other costs                           |  | 5,553                   |  | 3,877 
|Taxes other than on income                               |  | 621                     |  | 492   
|Repairs and maintenance                                  |  | 866                     |  | 822   
|Bad debt expense/(recovery)                              |  | 389                     |  | (140  
|Loss on sale of property, plant and equipment            |  | 601                     |  | 1,356 
|                                                         |  |                         |  |       
|Total operating expenses                                 |  | 60,254                  |  | 40,555
|                                                         |  |                         |  |       

Total operating expenses grew by 48.5% to RUR 60,254 million in 2006 from RUR 40,555 million in 2005. The increase in operating
expenses was mainly attributable to the aforementioned regulatory reform and restructuring of the Russian telecommunications sector and, in particular, expenses payable to local and intra-regional
operators for services provided to us pursuant to the new settlement scheme. As a result, our payments to Russian operators, including payments for call initiation and termination, the compensation
surcharges and agent fees, increased by 235.8% to RUR 29,355 million in 2006 from RUR 8,741 million in 2005. See Note 3 to our consolidated financial statements.

Wages,
salaries and other staff costs increased by 14.4% to RUR 7,147 million in 2006 from RUR 6,242 million in 2005. The growth in wages, salaries and other staff
costs was mainly due to scheduled average salary increases and was offset by a reduction in our employee headcount by 1.7% to 23,233 as of December 31, 2006 compared to 23,634 as of
December 31, 2005.

Depreciation
of property, plant and equipment increased by 18.0% to RUR 8,418 million in 2006 from RUR 7,136 million in 2005 as a result of significant acquisitions of
property, plant and equipment in 2005 and 2004.

In
2005, we recognized an impairment loss of RUR 4,970 million. The impairment loss was mainly attributable to the regulatory reform and restructuring of the national
telecommunications sector, including changes in the settlement scheme between operators and subscribers for the provision of domestic and international long-distance services, which came
into effect on January 1, 2006. Based on management's analysis, there were no indicators of impairment of assets or release of impairment losses for the previous year as of
December 31, 2006.

Charges
by Russian network operators increased by 235.8% to RUR 29,355 million in 2006 from RUR 8,741 million in 2005 due to the new scheme of settlements between
telecommunications operators effective from January 1, 2006.

Charges
by international network operators for the termination of outgoing international calls increased by 3.5% to RUR 7,304 million in 2006 from RUR 7,059 million in 2005
mainly due to a 9.2% increase in outgoing ILD traffic volumes from 1,769.3 million minutes in 2005 to 1,933 million minutes in 2006.

Administration
and other expenses increased by 43.2% to RUR 5,553 million in 2006 from RUR 3,877 million in 2005 primarily due to the restructuring of our business
model in the framework

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of
the aforementioned regulatory reform as well as the new settlement scheme with regional subscribers and local operators.

Taxes
(other than on income) increased by 26.2% to RUR 621 million in 2006 from RUR 492 million in 2005 mainly due to additional VAT of RUR 117 million
accrued and paid by us after the introduction of the new scheme of settlements with IRCs and other local operators.

Repairs
and maintenance costs did not change materially in 2006 compared to 2005.

We
incurred RUR 389 million of bad debt expenses in 2006 as compared to a RUR 140 million of bad debt provision recovered in 2005 primarily due to the introduction of the
new regulations governing the telecommunications industry which resulted in a significant change in the structure of our accounts receivable. The rate of collection of accounts receivable from end
users under the new scheme is lower than that from IRCs and other local operators under the scheme effective prior to January 1, 2006.

The
loss on sale of property, plant and equipment decreased to RUR 601 million in 2006 from RUR 1,356 million in 2005, as in 2006 we decommissioned most of our analog cable
systems and certain other equipment that was fully depreciated.

Operating Profit

In 2006, operating profit increased by RUR 905 million, or 226.3%, to RUR 1,305 million from RUR 400 million in 2005. The increase in
operating profit was primarily driven by the absence of an impairment charge in 2006 compared to a RUR 4,970 million impairment charge in 2005. However, our operating profit for the year ended
December 31, 2006 was negatively impacted by a compensation surcharge payment which was imposed from January 1, 2006 in the amount of RUR 4,397 million. See also Note 3
to our consolidated financial statements.

Income Tax Expense

Our 2006 income tax expense amounted to RUR 987 million compared to RUR 695 million in 2005. The increase was primarily due to an increase in our
operating profit. See Note 20 to our consolidated financial statements for additional information.



The discussion below of the financial results for the years ended December 31, 2005 and 2004 has been conformed to the presentation of revenues and certain
expenses as set forth above for the years ended December 31, 2006 and 2005, in particular, to reflect our current segments. Therefore, this discussion differs from the discussion included in
our annual report on Form 20-F for the year ended December 31, 2005 filed on June 29, 2006.

Revenues

In 2005, total revenues increased by 9.7% to RUR 40,955 million from RUR 37,318 million in 2004. The increase in total revenues was largely due to
growth in telephone traffic.

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Telephone traffic

|                                                         |  | Year ended December 31, |  | Change
|-------------------------------------------------------- |  | ----------------------- |  | ------
|
|
|Domestic long-distance traffic                           |  | 18,126                  |  | 17,297
|Outgoing international long-distance traffic             |  | 9,405                   |  | 9,060 
|Incoming and transit international long-distance traffic |  | 4,098                   |  | 4,041 
|                                                         |  |                         |  |       
|Total revenues from telephone traffic                    |  | 31,629                  |  | 30,398
|                                                         |  |                         |  |       

Revenues from telephone traffic represented 77.2% and 81.4% of total revenues in 2005 and 2004, respectively.

In
2005, revenues from DLD services increased by 4.7% to RUR 18,126 million compared to RUR 17,297 million in 2004 primarily due to a 4.0% increase in DLD traffic
volume. The principal reason behind the traffic growth was Russia's continued economic development coupled with higher fixed-line and mobile penetration, as well as our active marketing
efforts to strengthen our positions in the regional markets.

In
2005, revenues from outgoing ILD services increased by 3.8% to RUR 9,405 million from RUR 9,060 million in 2004 primarily as a result of a 55% increase in ILD
traffic volume carried on our network by alternative operators in 2004.

Revenues
from incoming ILD services increased by 1.4% to RUR 4,098 million in 2005 compared to RUR 4,041 million in 2004.

Rent of channels

|                                     |  | Year ended December 31, |  | Change
|------------------------------------ |  | ----------------------- |  | ------
|
|
|Total revenues from rent of channels |  | 6,045                   |  | 4,623 

Revenues from rent of channels represented 14.7% and 12.3% of total revenues in 2005 and 2004, respectively.

In
2005, our revenues from rent of channels increased by 30.8% to RUR 6,045 million from RUR 4,623 million in 2004. The growth in revenues was largely due to an
increase in the volume of leased line services offered to local operators and businesses.

Other revenues

|                                  |  | Year ended December 31, |  | Change
|--------------------------------- |  | ----------------------- |  | ------
|
|
|Television and radio transmission |  | 574                     |  | 602   
|Satellite services                |  | 548                     |  |      
|Internet access                   |  | 44                      |  |      
|FreePhone services                |  | 430                     |  | 142   
|Miscellaneous revenue             |  | 1,685                   |  | 1,553 
|                                  |  |                         |  |       
|Total other revenue               |  | 3,281                   |  | 2,297 
|                                  |  |                         |  |       

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In 2005, other revenues represented 8.0% of our total revenues compared to 6.1% in 2004. Our other revenues increased by 43% to RUR 3,281 million in 2005 compared to
RUR 2,297 million in 2004. The increase in other revenues was mainly attributable to recognition of revenue from satellite services as a result of the consolidation of GlobalTel in 2005,
as well as significantly increased revenue from FreePhone services due to growth in demand.

Operating Expenses

|                                                         |  | Year ended December 31, |   | Change
|-------------------------------------------------------- |  | ----------------------- | - | ------
|
|
|Wages, salaries, other benefits and payroll taxes        |  | 6,242                   |   | 5,109 
|Depreciation and amortization                            |  | 7,136                   |   | 7,498 
|Impairment of property, plant and equipment and goodwill |  | 4,970                   |   |      
|Charges by network operatorsinternational               |  | 7,059                   |   | 6,484 
|Charges by network operatorsnational                    |  | 8,741                   |   | 7,883 
|Administration and other costs                           |  | 3,877                   |   | 3,353 
|Taxes other than on income                               |  | 492                     |   | 587   
|Repairs and maintenance                                  |  | 822                     |   | 813   
|Bad debt expense/(recovery)                              |  | (140                    | ) | 369   
|Loss on sale of property, plant and equipment            |  | 1,356                   |   | 217   
|                                                         |  |                         |   |       
|Total operating expenses                                 |  | 40,555                  |   | 32,313
|                                                         |  |                         |   |       

Total operating expenses grew by 25.5% to RUR 40,555 million in 2005 from RUR 32,313 million in 2004, mainly due to
the recognized impairment loss and increased loss on the disposal of our property, plant and equipment, as well as growth in wages and salaries. The growth in operating expenses was partly offset by
lower depreciation charges and a decrease in allowance for doubtful accounts.

Charges
by Russian network operators increased by 10.8% to RUR 8,741 million in 2005 from RUR 7,883 million in 2004 due to a 2.8% increase the amount of
traffic terminated by these operators.

Charges
by international network operators for the termination of outgoing international calls increased by 8.8% to RUR 7,059 million in 2005 from
RUR 6,484 million in 2004. The increase was driven by a 14.8% increase in outgoing ILD traffic volumes, which were partly offset by a reduction in tariffs.

Wages,
salaries and other staff costs increased by 22.1% to RUR 6,242 million in 2005 from RUR 5,109 million in 2004. The growth in wages, salaries and other
staff costs was mainly due to planned average salary increases, offset by a reduction in the employee headcount by 6.5% to 23,634 as of December 31, 2005 compared to 25,285 as of
December 31, 2004.

Taxes
(other than on income) decreased by 16.1% to RUR 492 million in 2005 from RUR 587 million in 2004 mainly driven by the application of higher effective
property tax rates in 2004 due to changes in tax legislation.

Administration
and other expenses increased by 15.6% to RUR 3,877 million in 2005 from RUR 3,353 million in 2004, as the latter included a
RUR 428 million gain on extinguished liabilities which were no longer a legal obligation. Not taking into account the gain on extinguished liabilities, the administrative and other
expenses increased by 2.5% from RUR 3,781 million in 2004 to RUR 3,877 million in 2005.

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We
recovered RUR 140 million of bad debt expense in 2005 as compared to having a RUR 369 million of bad debt expense in 2004 primarily because of an improvement in
debt collection.

Depreciation
of property, plant and equipment decreased by 4.8% to RUR 7,136 million from RUR 7,498 million in 2004. The decrease in depreciation charges in
2005 was due to the fact certain property, plant and equipment were disposed of or fully depreciated in 2004.

The
loss on sale of property, plant and equipment grew more than five times to RUR 1,356 million in 2005 from RUR 217 million in 2004 as we started
decommissioning a larger number of analog cable systems and certain other equipment in 2005.

In
2005, we assessed the impact of the new rules and regulations on our business and results of operations, which resulted in a RUR 4,970 million impairment loss recognized
in the statement of income for the year ended December 31, 2005 related to the write-down of certain property, plant and equipment of RUR 4,961 million and goodwill of
RUR 9 million to the recoverable amount. The recoverable amount was based on value in use and was determined at the cash-generating unit level. The
cash-generating unit containing goodwill consists of Rostelecom, Westelcom and MTs NTT. See Note 7 to our consolidated financial statements for additional information.



In 2005, operating profit decreased by RUR 4,605 million, or 92.0%, to RUR 400 million from RUR 5,005 million in 2004
primarily driven by the impairment charge.



Our 2005 income tax expense amounted to RUR 695 million compared to RUR 1,353 million in 2004. The decrease was primarily due to a
decrease in our operating profit primarily due to the impairment of property, plant and equipment.

U.S. GAAP information

Our consolidated financial statements are prepared in accordance with IFRS, which differs in certain respects from U.S. GAAP. For the years ended
December 31, 2006 and 2005, net income reported under IFRS amounted to RUR 1,456 million and RUR 978 million, respectively, as compared to net income reported under
U.S. GAAP in 2006 and 2005 of RUR 271 million and RUR 3,452 million, respectively. As of December 31, 2006 and 2005, total shareholders' equity reported under
IFRS was RUR 50,945 million and RUR 49,697 million, respectively, as compared to total shareholders' equity reported under U.S. GAAP of
RUR 54,306 million and RUR 54,348 million, respectively.

The
most significant differences between IFRS and U.S. GAAP that affect our financial position and results of operations relate to accounting for property, plant and equipment and
investments in associates, business combinations, goodwill and related deferred taxes. A brief summary of these
differences is presented below. For additional information, see Note 33 to our consolidated financial statements.



Pursuant to provisions of IAS No. 36, in 2005, we performed an assessment of the impact of the new rules and regulations on our business and results of
operations and recognized an impairment loss of RUR 4,970 million in our IFRS consolidated financial statements related to property, plant and equipment and goodwill in the amount of
RUR 4,961 million and RUR 9 million, respectively, to write them down to their recoverable amounts.

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Under
U.S. GAAP, Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," we are required
to make an initial assessment of impairment based on undiscounted cash flows whenever there is an indication that impairment may exist. Due to the fact that the sum of undiscounted expected future
cash flows was in excess of the carrying amount of our property, plant and equipment as of December 31, 2005, we did not recognize an impairment loss for U.S. GAAP reporting purposes.
Thus, a different asset base, in addition to the difference in asset base described below, was used to compute U.S. GAAP depreciation expense, loss on disposal of property, plant and equipment
and the related deferred tax liability in 2006.

In
our IFRS consolidated financial statements for the year ended December 31, 1998, we recognized an impairment loss of RUR 8,699 million on our property, plant and
equipment other than construction in progress. Due to the fact that the sum of undiscounted expected future cash flows was in excess of the carrying amount of our productive property, plant and
equipment as of December 31, 1998, we recognized only an impairment loss of RUR 4,045 million related to non-productive social assets for U.S. GAAP reporting
purposes. Thus, a different asset base was used to compute U.S. GAAP depreciation expense, loss on disposal of property, plant and equipment and the related deferred tax liability commencing
in 1999.



For the year ended December 31, 2006, we adopted the recognition and disclosure provisions of FASB Statement No. 158, Employers' Accounting of
Defined Benefit Pension and Other Postretirement Plans,
an amendment to FASB statements Nos. 87, 88, 106, and 132 (R). Statement 158 required us to recognize the funded status of our pension plan in the statement of financial position as of
December 31, 2006, with a corresponding adjustment to accumulated other comprehensive income, net of tax. The adjustment to accumulated other comprehensive income represents unrecognized prior
service costs, which were previously netted off against the plan's funded status in our consolidated balance sheet pursuant to the provisions of Statement 87. These amounts will be subsequently
recognized as net periodic pension cost pursuant to our historical accounting policy for amortizing such amounts.

The
adoption of Statement 158 had no effect on our consolidated statement of income for the year ended December 31, 2006, or for any prior period presented, and it will not affect
our operating results in future periods.

Nevertheless,
the adopting of the provisions of Statement 158 had an effect on our statement of financial position as of December 31, 2006 as presented in the following table:

|                                       |  | As of December 31, 2006 | 
|-------------------------------------- |  | ----------------------- | 
|
|
|Defined benefit obligation             |  | 175                     | 
|Deferred tax asset                     |  |                        | 
|                                       |  |                         | 
|Total liabilities                      |  | 175                     | 
|                                       |  |                         | 
|Accumulated other comprehensive income |  |                        | 
|                                       |  |                         | 
|Total shareholders' equity             |  |                        | 
|                                       |  |                         | 

See Notes 24 and 33 to our consolidated financial statements disclosing the assumptions made in pension liability calculation and
for other details.

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Before IFRS No. 3 "Business Combinations" was adopted, we amortized goodwill acquired in business combinations. As described in Note 9 to our
consolidated financial statements, during 2002, we acquired 14.9% of the voting stock of Golden Telecom, Inc. In the opinion of management, we exercised significant influence over financial and
the operating policies of Golden Telecom. In accordance with IAS No. 28, "Accounting for Investments in Associates," we amortized the equity method goodwill related to our investment in
Golden Telecom over its estimated useful life of eight years. During 2004 the equity method goodwill related to our investment in Golden Telecom recognized in our IFRS accounts amounted to
RUR 135 million.

Effective
January 1, 2005, IFRS No. 3 "Business Combinations" prohibited the amortization of goodwill and required the testing of its impairment annually.

In
accordance with SFAS No. 142, "Goodwill and Other Intangible Assets," goodwill is not amortized and is subject to annual impairment tests in accordance with SFAS
No. 142. We performed the annual impairment test in respect to recoverability of the carrying amount of goodwill at December 31, 2006 and 2005 by comparing the fair value to the carrying
amount for both IFRS and U.S. GAAP purposes. The fair value exceeded the carrying amount.



As described in Note 6 to our consolidated financial statements, we obtained control over GlobalTel in 2005, and accounted for it using the purchase
method, in accordance with the provisions of IFRS No. 3 "Business Combinations." We recognized our share in the accumulated deficit of GlobalTel in the amount of RUR 826 million
directly in equity.

For
U.S. GAAP purposes, we consolidated GlobalTel on April 25, 2005 in accordance with provisions of EITF 96-16 "Investor's Accounting for an Investee
when the Investor has a Majority of the Voting Interest but the Minority has Certain Approval or Veto Rights" by changing the presentation of the majority-owned investment in our consolidated
financial statements that was previously reported as a single-line investment in associates accounted for by the equity method. Upon consolidation, we recorded the assets and liabilities
of GlobalTel at their carrying values as of that date in our consolidated balance sheet and suspended cumulative prior years equity method losses, including those attributable to the minority
shareholders, of RUR 826 million, which were reported as the cumulative effect adjustment to the net income under U.S. GAAP for the year ended December 31, 2005.

New accounting pronouncements



During 2005 and 2006, the IASB published several revised International Accounting Standards and issued several new International Financial Reporting Standards.
Most of these revised and new standards will apply to accounting periods commencing on or after January 1, 2007. The new pronouncements are follows:



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We
do not expect that the adoption of the pronouncements listed above will have a significant impact on our results of operations and financial position in the period of initial
application. The adoption of IFRS 7 will significantly affect the disclosures relating to financial instruments as presented in the notes to our consolidated financial statements.



In September 2006, the SEC staff issued Staff Accounting Bulletin No. 108 (SAB 108) Considering the Effects of Prior Year Misstatements when
Quantifying Misstatements in Current Year Financial Statements. SAB 108 eliminates the diversity of practice surrounding how public companies quantify financial statement misstatements. It
establishes an approach that requires quantification of financial statement misstatements based on the effects of the misstatements on each of the Company's financial statements and the related
financial statement disclosures. SAB 108 must be applied to annual financial statements for their first fiscal year ending after November 15, 2006. The adoption of the provisions of
SAB 108 did not have a material impact on our results of operations or financial position.



In July 2006, the FASB issued FASB Interpretation No. 48 (FIN 48), Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement
No. 109, Accounting for Income Taxes. FIN 48 clarifies the accounting for income taxes by prescribing the minimum recognition threshold a tax position is required to meet before
being recognized in the financial statements. FIN 48 also provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and
transition. In addition, FIN 48 excludes from the scope income taxes from SFAS No. 5, Accounting for Contingencies. FIN 48 is effective for fiscal years beginning
after December 15, 2006; however, early adoption is allowed. We are going to adopt FIN 48 for the fiscal year 2007. The impact of the implementation of FIN 48 is to be recognized
as a change in the opening balance of retained earnings as of January 1, 2007. We are still assessing the effect of adoption of FIN 48 on our results for the year ended
December 31, 2007.

In
September 2006, the FASB issued FASB statement No. 157 (SFAS No. 157), Fair Value Measurements. The standard provides guidance for using fair value to measure assets and
liabilities. The standard applies whenever other standards require (or permit) assets or liabilities to be measured at fair value. The standard does not expand the use of fair value in any new
circumstances. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007. Management does not believe that the adoption of SFAS No. 157 will have a
material impact on our results of operations or financial position.

In
February 2007, the FASB issued FASB statement No. 159 (SFAS No. 159), The Fair Value Option for Financial Assets or Financial Liabilities. The standard permits entities
to choose to measure many financial instruments and certain other items at fair value. The statement is expected to expand the use of fair value measurement. SFAS No. 159 is effective for
fiscal years beginning after November 15, 2007, but earlier adoption is allowed under certain conditions. Management does not believe that the adoption of SFAS No. 159 will have a
material impact on our results of operations or financial position.

In
June 2006, the Emerging Issues Task Force reached a consensus on EITF Issue No. 06-03 (EITF No. 06-03), "How Taxes Collected from
Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement (That Is, Gross versus Net Presentation)."

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EITF No. 06-03
provides that the presentation of taxes assessed by a governmental authority that is directly imposed on a revenue-producing transaction between a seller and a
customer on either a gross basis (included in revenues and costs) or on a net basis (excluded from revenues) is an accounting policy decision that should be disclosed. The provisions of
EITF No. 06-03 become effective for fiscal years beginning after December 15, 2006. Management does not believe that the adoption of EITF No. 06-03
will have a material impact on our consolidated financial position or results of operations.

B.    Liquidity and Capital Resources

Our principal sources of funds historically have been cash flows from our operating activities and vendor financing arrangements related to capital expenditures.
Our operating activities generated net cash of RUR 7,421 million in 2006 and RUR 10,943 million in 2005. Certain of our vendor financing arrangements were secured by
property, plant and equipment. As of December 31, 2006, approximately 8.7% of our total property, plant and equipment were pledged to secure such financing.

We
expect to continue financing a significant portion of our capital expenditures from internal sources, such as cash from operations, and to raise the remaining amounts through external
sources, including bank financing. There can be no assurance, however, that such external financing will be available to us on commercially acceptable terms.

Management
believes that cash flows generated from operations in 2007 and 2008 will be sufficient to finance our working capital needs and to repay our existing obligations as they
become due.

Our
outstanding indebtedness, including loans related to vendor financing and credit agreements, decreased by RUR 284 million, or 5%, to RUR 5,480 million as
of December 31, 2006 from RUR 5,764 million as of December 31, 2005. Of our outstanding indebtedness as of December 31, 2006, RUR 4,820 million was due
within one year and RUR 660 million was due between one and four years. The outstanding indebtedness due within one year includes the RUR 2,636 million loan provided by
Vnesheconombank and Credit Swiss First Boston, or CSFB, which is included in the current portion of long-term loans due to non-compliance with one of the covenants set out in
the credit facility agreement as of the balance sheet date, for which we had not obtained a waiver.
Therefore, the full amount of the loan is included in the current portion of long-term loans as of December 31, 2006. Subsequently, in June 2007, we received notice from the banks
confirming their waiver of the breach of the contract due to our noncompliance with one of the covenants. As of March 31, 2007 and subsequent interim reporting dates, we were in compliance with
all covenants.

As
of December 31, 2006 and 2005, most of our interest bearing loans were denominated in foreign currencies. The amount available for drawing under our credit agreements as of
December 31, 2006 was U.S.$ 0.56 million, EUR 0.16 million and RUR 3 million (together, totaling RUR 23 million). Of the total foreign currency
denominated borrowings:



Between
January 1, 2007 and December 1, 2007, the Russian ruble increased in value as compared to the U.S. dollar by 7.8%, increased in value as compared to the Japanese
yen by approximately 0.3%, and decreased as compared to the euro by 3.6%, and this has decreased the ruble carrying value of our foreign currency borrowings by approximately
RUR 223 million or approximately 6% of our total borrowings. However, any devaluation would both increase our effective cost of borrowing and make it more difficult to incur additional
indebtedness and repay or re-finance existing indebtedness.

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The
weighted average interest rate of our loans was 7.8%, 5.4% and 6.1% for the years ended December 31, 2006, 2005 and 2004, respectively. We do not use any financial instruments
to hedge against our exposure to fluctuations in interest and foreign exchange rates.

The
maturity profile of our interest bearing loans and vendor financing, their currency and the interest rate structure is set forth in Notes 17 and 18 to our consolidated
financial statements. The summarized maturity profile of our interest bearing loans and other borrowings as of December 31, 2006 is presented below (in RUR million):

|Maturity                                                 |  | December 31, 2006
|-------------------------------------------------------- |  | -----------------
|Current portion of interest bearing loans and borrowings |  | 4,820            
|Between one to two years                                 |  | 560              
|Between two to three years                               |  | 63               
|Between three to four years                              |  | 37               
|Non-current portion of interest bearing loans            |  | 660              
|                                                         |  |                  
|Total interest bearing loans and vendor financing        |  | 5,480            
|                                                         |  |                  

Liquidity

As of December 31, 2006 and 2005, we had total cash and cash equivalents of RUR 2,353 million and RUR 2,398 million, respectively. In
addition, as of December 31, 2006 and 2005, we had short-term investments of RUR 8,496 million and RUR 12,238 million, respectively. As of December 31, 2006, we had unused
availability under our credit facilities of RUR 23 million.

As
of December 31, 2006, we had working capital of RUR 7,692 million compared to working capital of RUR 13,532 million as of December 31, 2005.
The decrease in working capital was primarily attributable to (a) classification of the entire amount of the loan from Vnesheconombank and CSFB as current as of
December 31, 2006, (b) new capital expenditures, and (c) acquisitions of Zebra Telecom and Globus-Telecom.

As
of December 31, 2006, we were not in compliance with a covenant in relation to a loan we obtained from Vnesheconombank and CSFB and no waiver for this breach had been obtained
from the banks. Therefore, the entire loan amount was included in the current portion of long-term loans in the consolidated balance sheet as of December 31, 2006. Subsequently, in
June 2007, we received notice from the banks confirming their waiver of this breach. Starting from March 31, 2007, we are in compliance with all covenants. Had we been in compliance with all
loan covenants, the loan from Vnesheconombank and CSFB would have been calssified as a long-term loan and our working capital as of December 31, 2006 would have been
RUR 10,328 million.

Our
short-term investments have been primarily comprised of liquid bills of exchange and short-term deposits. We invest temporarily available funds in liquid
bills of exchange issued by various Russian companies maturing within 12 months after the balance sheet date or with no fixed maturity. We sold a large portion of the bills by the
year-end. See Note 12 to our consolidated financial statements.

For
a description of our external financings, see Notes 17 and 18 to our consolidated financial statements.

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Loans and Borrowings

As of December 31, 2006, the total amount of interest bearing loans outstanding was RUR 3,478 million compared with
RUR 4,087 million as of December 31, 2005.





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Japanese Yen Denominated Loans



Euro Denominated Loans



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Russian Ruble Denominated Loans



Vendor Financing Payable

As of December 31, 2006, we had the following outstanding vendor financing payable:



|                |  | Millions of rubles
|--------------- |  | ------------------
|Payable in 2004 |  | 423               
|Payable in 2005 |  | 184               
|Payable in 2006 |  | 184               
|Payable in 2007 |  | 184               
|Payable in 2008 |  | 107               
|                |  |                   
|Total           |  | 1,082             
|                |  |                   

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Leases

We operate several lease agreements with the following non-affiliated counterparties:

CJSC Sinterra

In April 2005, we entered into an IRU finance lease agreement for the use of a portion of the network capacity of a terrestrial optical fiber cables. The lease
agreement is non-cancellable for the period of 15 years, which approximates the remaining useful life of these cables. Effective interest rate of the lease is 7.21% p.a. Lease
payments are denominated in U.S. dollars. Present value of minimum lease payments under this lease agreement amounted to RUR 372 million as of December 31, 2006.

OJSC RTC-Leasing

In 2006, we entered into a number of minor finance lease agreements with OJSC RTC-Leasing for the purchase of telecommunications equipment and
vehicles for an average period of 3 years. Effective interest rate of these leases varies from 10.3% to 12.2% p.a. Present value of minimum lease payments under these lease agreements amounted
to RUR 97 million as of December 31, 2006.

Military unit No.32152

We also entered into a finance lease agreement for the use of a digital telecommunications station over its estimated remaining useful life of 7 years.
Effective interest rate of the lease is 11.7% p.a. Lease payments are denominated in rubles. Present value of minimum lease payments under this lease agreement amounted to RUR 36 million
as of December 31, 2006.

Under
all material lease contracts, we have no uncertainties which can significantly affect our operating results in the future.

Cash Flows

A summary of our cash flows is presented below (in RUR million):

|                                                    |  | Year ended December 31, |  
|--------------------------------------------------- |  | ----------------------- | -
|
|Net cash provided by operating activities           |  | 7,421                   |  
|Net cash used in investing activities               |  | (4,456                  | )
|Including purchase of property, plant and equipment |  | (7,177                  | )
|Net cash provided by (used in) financing activities |  | (3,004                  | )

Net cash provided by operating activities amounted to RUR 7,421 million in 2006 as compared to RUR 10,943 million in
2005. The principal reason for the decrease in positive operations cash flow was the introduction of the new scheme of settlements, which resulted in additional expenses such as compensation
surcharges and agency fees.

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Net cash used in investing activities during 2006 decreased by RUR 5,620 million to RUR 4,456 million, compared to RUR 10,076 million in 2005.
The 56% decrease was primarily due to a net cash inflow from the sale of short-term investments in the amount of RUR 3,624 million in 2006 compared to net cash outflow
generated by the purchase of short-term investments in the amount of RUR 3,350 million in 2005.

Net
cash used in financing activities amounted to RUR 3,004 million in 2006, compared to net cash provided by financing activities in 2005 of RUR 275 million,
primarily due to our drawdown of a U.S. dollar-denominated loan in December 2005 and scheduled repayment of the outstanding long-term loans in 2006.

Restrictions on Dividend Distribution

The amount of our dividend distributions is limited by provisions of Russian law. For example, Russian law requires that, among other things, dividends can only
be paid in an amount not exceeding our retained earnings as determined under RAS. In addition, dividends may only be paid if the value of the company's net assets is not less than the sum of the
company's charter capital, the company's reserve fund and the difference between the liquidation value and the par value of the issued and outstanding preferred stock of the company, if any, as
determined under RAS. Our retained earnings for the years ended December 31, 2006, 2005 and 2004 that was distributable under Russian legislation amounted to RUR 35,171 million,
RUR 28,972 million and RUR 20,670 million, respectively.

Capital Expenditures

Pursuant to our capital expenditure program, approved by the Board of Directors, we expect to make capital expenditures of approximately
RUR 5,368 million for the year ending December 31, 2007, compared to actual capital expenditures of RUR 7,706 million in 2006. We expect to fund our capital
expenditures with cash from operations and external financing. For additional information regarding our capital expenditures and the major projects we will undertake in 2007 and subsequent years, see
"Item 4. Information on the CompanyA. History and DevelopmentInvestment Policy HighlightsCapital ExpendituresMain directions of development
in 2007 and beyond."

Credit Rating Discussion

Our credit ratings impact our ability to obtain short- and long-term financing, and the cost of such financing. In determining our credit ratings, the
rating agencies consider a number of factors, including our operating cash flows, total debt outstanding, commitments, interest requirements, liquidity needs and availability of liquidity. Other
factors considered may include our business strategy, the condition of our industry and our position within the industry. Although we understand that these and other factors are among those considered
by the rating agencies, each agency might calculate and weigh each factor differently.

Our
credit rating as of the date of this annual report is as follows:

|Rating Agency        |  | Long-Term Debt Rating |  | Outlook/Watch
|-------------------- |  | --------------------- |  | -------------
|Standard & Poor's(1) |  | BB-                   |  | Stable       

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None of our existing indebtedness has any triggers related to our credit ratings.

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C.    Research and Development, Patents and Licenses

Research and Development

We are involved in research and development through our technical development program, pursuant to which we work with several research and development
organizations. The aims of our technical development program are:



We
did not incur any research and development expenses for the years ended December 31, 2006, 2005 and 2004.

Trademarks

On April 10, 1995, we registered our trademark with Rospatent, a government register of patents and trademarks:

GRAPHIC

As
a result of our merger with MMT, we also obtained the following trademark registered by MMT in 2000:

GRAPHIC

Licenses

Substantially all of our revenues are derived from operations conducted pursuant to licenses. These licenses have scheduled expiration dates ranging from 2008 to
2013. We have no reason to believe that the licenses will not be renewed or that any license will be suspended or terminated.

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The
following table summarizes the terms of our principal telecommunications licenses:

|License Number |  | Types of Services                                                             |  | Territory                                            |  | Date Issued        |  | Expiration Date   
|-------------- |  | ----------------------------------------------------------------------------- |  | ---------------------------------------------------- |  | ------------------ |  | ------------------
|29777          |  | DLD and ILD Communications                                                    |  | Russian Federation                                   |  | December 11, 2003  |  | December 11, 2013 
|29778          |  | Channel Leasing                                                               |  | Russian Federation                                   |  | December 11, 2003  |  | December 11, 2013 
|36738          |  | Local Telephone Communications (except via Payphones and Public Call Offices) |  | 6 republics and 35 regions of the Russian Federation |  | November 1, 2005   |  | November 1, 2010  
|36739          |  | Local Telephone Communications via Public Call Offices                        |  | Moscow, Lyubertsy and the Moscow region              |  | November 1, 2005   |  | November 1, 2010  
|36740          |  | Local Telephone Communications via Payphones                                  |  | Moscow, Lyubertsy and the Moscow region              |  | November 1, 2005   |  | November 1, 2010  
|44219          |  | Local Telephone Communications via Payphones                                  |  | Moscow region                                        |  | September 21, 2006 |  | September 21, 2011
|32898          |  | Intra-regional Telephone Communications                                       |  | Moscow and the Moscow region                         |  | July 15, 2005      |  | July 15, 2010     
|31540          |  | TV and Radio Broadcasting                                                     |  | 27 regions of the Russian Federation                 |  | May 10, 2005       |  | June 17, 2009     
|45945          |  | Cable Casting                                                                 |  | City of Valday of Novgorod region                    |  | November 11, 2006  |  | November 11, 2011 
|48652          |  | Telematic Services                                                            |  | Russian Federation                                   |  | May 15, 2007       |  | May 15, 2012      
|48653          |  | Data Services (Other Than Transmission Of Voice Information)                  |  | Russian Federation                                   |  | May 15, 2007       |  | May 15, 2012      
|49540          |  | Data Services For Transmission Of Voice Information                           |  | Russian Federation                                   |  | May 15, 2007       |  | May 15, 2012      
|27895          |  | Telegraph Communication Services                                              |  | Russian Federation                                   |  | September 5, 2003  |  | September 5, 2008 

Pursuant to License No. 29777, we are authorized to provide the following public switch network communications services:
long-distance and international telephone communications and telephone communications with the use of the intelligent communications network (ICN) of the licensee. The capacity of the
licensee's ICN at the end of the term of the license should be not less than 85,000 simultaneous calls.

Pursuant
to License No. 29778, we are authorized to provide customers with local, long-distance and international channels and routes, as well as physical circuits for
transmitting telecommunications signals. Under the license, the total number of allocated voice frequency channels (main digital channels), including those included into digital routes, should be not
less than 100,000.

Pursuant
to License No. 36738, we are authorized to provide customers with local telecommunications services, except for the services provided via payphones and public call
offices. Under the license, we are required to provide subscribers with permanent access to our network; local calls via fixed-line telephone networks with local phone numbers provided, as
well as local voice, fax and data communications; access to PSTN, except mobile networks; access to information and request services; and free 24-hour access to emergency services.

Pursuant
to License No. 36739, we are authorized to provide customers with local telecommunications services via public call offices. Under the license, we are required to provide
subscribers with local voice calls via fixed-line telephone networks; access to PSTN, except mobile networks; access to information & request services; and free 24-hour
access to emergency services.

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Pursuant
to License No. 36740 and License No. 44219, we are authorized to provide customers with local telecommunications services via payphones. Under the license,
we are required to provide subscribers with local voice calls via fixed-line telephone networks; access to PSTN, except mobile networks; access to information & request services;
and free 24-hour access to emergency services.

Pursuant
to License No. 32898, we are authorized to provide customers with intra-regional telecommunications services. Under the license, we are required to provide subscribers
with intra-regional calls via fixed-line telephone networks with local phone numbers provided, as well as local voice, fax and data communications; access to PSTN, except mobile networks;
and access to information and request services.

Pursuant
to License No. 31540, we are authorized to provide services for broadcasting television and radio programs and ancillary information in Russia.

Pursuant
to License No. 49945, we are authorized to provide our customers in the city of Valday in the Novgorod region with cable casting services.

Pursuant
to License No. 48652, we are authorized to provide our customers with telematic services in Russia.

Pursuant
to License No. 48653 and License No. 49540, we are authorized to provide our customers with data services, including transmission of voice and other
information, in Russia. Pursuant to License No. 27895, we are authorized to provide telegraph services, including the passing and processing of international and long-distance
telegraph traffic and to provide AT/Telex network services.

Under
the terms of our licenses, except in the case of local telephone communications services, we may refuse to provide all other types of our services to customers where:
(i) the provision of such services
may endanger the national security and defense system; (ii) the provision of such services is precluded by any physical, topographical or other natural circumstance; (iii) the customer
does not agree with the terms and conditions on which such services are provided or does not make timely payments for the services; and (iv) the customer uses or intends to use the
communications equipment for unlawful purposes or uses communications channels, trunks and equipment in violation of the technical rules of the suggested services under our licenses or uses equipment
which is not certified by the Ministry of Information Technologies and Communications.

D.    Trend information

While planning our future activity, we consider existing trends within the Russian telecommunications industry and also endeavor to take into account the
possibility of future structural and regulatory changes resulting from the introduction of the new DLD/ILD regulatory regime.

The
reform of the Russian telecommunications industry began with the introduction of the Communications Law in 2004, and has intensified as implementing regulations have been enacted
thereunder. In particular, several regulations were enacted in 2005 and 2006 that directly impact the DLD/ILD telecommunications services market in Russia and have lead to the restructuring and
liberalization of this market. Most significantly, regulations enacted in 2005 pursuant to the Communications Law allow telecommunications operators to apply for DLD/ILD telecommunications services
licenses and radically restructured our relationships with IRCs, local operators and subscribers. Our future operations may be substantially impacted by the regulatory reforms that have been enacted
with respect to the DLD/ILD telecommunications services market.

The
new telecommunications industry legislation, effective from January 1, 2006, has changed principles for interaction of operators, including us, when providing local,
intra-regional, domestic and international telecommunications services. The new rules allow Russian subscribers to choose providers of long-distance telecommunications services and made
possible for telecommunications operator

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meeting
certain requirements to enter the long-distance telecommunications market. To comply with the new rules, we fundamentally changed the way we operate and began providing
long-distance services directly to end users in all the regions of Russia through the network infrastructure of local and intra-regional operators. In turn, local and intra-regional
operators, including IRCs, began providing intra-regional and local origination and termination services to us.

The
liberalization has significantly changed the competitive environment in the Russian long-distance sector. The number of operators licensed by the Russian Ministry of
Information Technologies and Communications to provide long-distance services
amounted to 30 by the end of 2006, and in early 2006, one operator began providing long-distance telecommunications services. To date, two additional operators have begun providing DLD/ILD
services in Russia in 2007.

Certain
gaps still remain in the new legislative framework and, as a result, the extent to which the regulatory regime will ultimately impact our business, financial condition and
results of operations is still unclear. However, we have endeavored to adopt a range of measures in an effort to minimize the adverse consequences of DLD/ILD market liberalization, develop new
business areas and enhance our overall competitiveness.

Among
the trends that continued to emerge in 2006 and which we expect to continue through 2007 are the increased demand for DLD/ILD services by all subscriber segments and increased
demand for certain value-added services, in particular, Internet Access and FreePhone services. At the same time, competition has increased due to the growth of alternative operators and emergence of
new DLD/ILD operators following the enactment of the new regulations, and we expect competition to continue to intensify in 2007 and beyond.

Our
efforts in 2006 were primarily aimed at adapting our business model to the new regulatory regime and intensified competitive environment. We focused on strengthening our partnerships
with regional and local telecommunications operators, engaging them as our agents, and developing direct business-to-client relationships with end users in the most profitable
segments. As a result, DLD and outgoing ILD traffic volumes on our network increased by 3.4% and 9.2%, respectively, in 2006 compared to 2005, amounting to 9,722 million minutes and
1,933 million minutes, respectively.

In
2006, due to our continued efforts aimed at optimizing our tariff policy, we achieved growth of traffic from international operators, representing a continued increase of our market
share. Incoming ILD traffic totaled 2,461 million minutes, representing an increase of 31.2% compared to 2005.

We
also devoted significant attention to the development of our backbone and modern flexible multiplexer networks to allow us to meet a growing demand for leased line services from
operators and businesses. Our 2006 revenue from leased line services totaled RUR 7,116 million, representing a 17.7% increase compared to 2005.

In
2006, we introduced a new intelligent platform with improved capacity to satisfy increasing demand for intelligent telecommunications services from current and new customers. We
believe our new intelligent platform will strengthen our market position, enhance the quality of current services and expand the range of new services available to operators, corporate clients and
individual subscribers. Our revenue from intelligent network services amounted to RUR 761 million in 2006, representing a 76.8% increase compared to 2005.

In
an effort to improve our competitive position, we have developed a comprehensive offering of bundled services for corporate customers that includes, in addition to traditional
domestic and international long-distance services, high-speed Internet access, IP VPN as well as intelligent network services. We also began to aggressively promote our IP VPN
services, which allow the interconnection of all of a customer's branches in a single protected private corporate network of high reliability with a full range of telecommunications services.

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We
also began to establish Customer Care Centers, or CCCs, throughout Russia in 2006. CCCs are aimed at increasing our support services for our long-distance
telecommunications service end users. At the CCCs, customers can make payments for telecommunications services, sign agreements with us or receive individual consultations from our
customer-care professionals. Thus far, we have opened 87 CCCs in 2006 and 2007.

In
2007, we plan to continue to develop the foregoing services as well as promote new and value-added services. In particular, in an effort to expand our
business-to-business and business-to-clients relationships, we plan to actively promote bundled telecommunications services, to develop existing and new
services based on our intelligent platform and IP/MPLS network, as well as to increase efficiency of the customer care and sales support units.

Among
our other key priorities in 2007 is the further enhancement of our high-capacity trunk network, implementation of advanced technologies and installation of
high-end DWDM and data transmission facilities. We plan to improve throughput capacity of our telecommunications network in order to meet growing demand for DLD/ILD services, as well as
transit traffic services. We are also focusing on expanding and increasing the capacity of our multi-service IP/MPLS network in order to provide high-end data transmission services, such
as high-speed Internet access and IP VPN, as well as to develop other innovative telecommunications services.

E.    Off-Balance Sheet Arrangements

As of December 31, 2006, we did not have any off-balance sheet arrangements.

F.     Tabular Disclosure of Contractual Obligations

The following table summarizes the contractual principal maturities of our debt, including our current portion, and purchase obligations, each as of
December 31, 2006. We expect to meet our contractual obligation payment requirements with cash flows from operations.

|                         |  |        |  | Payments due by period (RUR in millions)
|------------------------ |  | ------ |  | ----------------------------------------
|
|Contractual obligations  |  | 7,419  |  | 7,283                                   
|Constructive obligations |  | 104    |  | 26                                      
|Pension liability        |  | 175    |  | 64                                      
|Lease obligations        |  | 505    |  | 78                                      
|Vendor financing payable |  | 2,002  |  | 1,640                                   
|Loans and borrowings     |  | 3,478  |  | 3,180                                   
|Capital commitments(1)   |  | 2,915  |  | 2,265                                   
|                         |  |        |  |                                         
|Total                    |  | 16,598 |  | 14,536                                  
|                         |  |        |  |                                         

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Future interest payments relating to the above mentioned obligations and excluded from present value amounts were as follows at
December 31, 2006:

|                         |  |       |  | Payments due by period (RUR in millions)
|------------------------ |  | ----- |  | ----------------------------------------
|
|Contractual obligations  |  | 30    |  | 1                                       
|Constructive obligations |  | 37    |  | 5                                       
|Pension Liability        |  | 58    |  | 3                                       
|Lease obligations        |  | 216   |  | 34                                      
|Vendor financing payable |  | 215   |  | 136                                     
|Loans and borrowings     |  | 879   |  | 313                                     
|                         |  |       |  |                                         
|Total                    |  | 1,435 |  | 492                                     
|                         |  |       |  |                                         

Item 6.Directors, Senior Management and Employees

A.    Directors and Senior Management

We are governed by (i) our Board of Directors, (ii) our Management Board and (iii) other executive officers not serving on the Management
Board. Members of the Board of Directors are responsible for our strategic development, while the Management Board is responsible for implementing such strategies and our overall management. There are
no service contracts between us and members of our Board of Directors. There are no family relationships between any of the members of the Board of Directors and the Management Board members.

Board of Directors

As of the date of this annual report, the Board of Directors consisted of the following persons:

|Name                     |  | Year of Birth
|------------------------ |  | -------------
|Mikhail A. Alexeev       |  | 1954         
|Yevgeny A. Chechelnitsky |  | 1973         
|Valery V. Degtyarev      |  | 1957         
|Anatoly A. Gavrilenko    |  | 1972         
|Alexander N. Kiselev(1)  |  | 1962         
|Sergey I. Kuznetsov      |  | 1953         
|Yevgeny I. Logovinsky    |  | 1972         
|Nikolai L. Mylnikov      |  | 1974         
|Elena P. Selvich         |  | 1968         
|Maxim Yu. Ysyganov       |  | 1972         
|Yekaterina O. Vasilyeva  |  | 1971         

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Mikhail A. Alexeevhas been a member of our Board of Directors since June 2007. He also serves as
Chairman of the board of directors of OJSC Tetrasvyaz and a member of the board of directors of OJSC Far Eastern Telecommunications Company, CJSC Radiotel, CJSC BaltAvtoPoisk, OJSC CenterTelecom and
OJSC North-West Telecom. From 2004 to 2005, he served as Aide to the Minister at the Ministry of Information Technologies and Communications of the Russian Federation. From 2000 to 2004,
he served as Advisor to the Minister and Deputy Minister at the Ministry of

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Communications
and Informatization of the Russian Federation. Mr. Alexeev graduated from the Higher School of KGB (Committee for State Security) of the USSR in 1983 with a degree in Law.

Yevgeny A. Chechelnitskyhas been a member of our Board of Directors since June 2005. Since August 2006, he has served as Deputy General
Director and since December 2006, as a member of the Management Board of OJSC Svyazinvest. He also serves as Chairman of the board of directors of OJSC Sibirtelecom, OJCS Dalsvyaz, and OJSC
Uralsvyazinform, and as a member of the board of directors of NPF Telecom-Soyuz. From 2004 to August 2006, he served as Deputy Head of the Federal Service on Oversight in the Sector of Communications.
From 2000 to 2004, he served as Deputy Head of the Department of Economic and Investment Policies of the Ministry of Information Technologies and Communications. Mr. Chechelnitsky graduated
from the St. Petersburg State University of Economics and Finance in 1995 with a degree in Economics and Finance.

Valery V. Degtyarevhas been a member of our Board of Directors since June 2004. Since 2004, he has served as General Director at OJSC
Tetrasvyaz. Mr. Degtyarev also serves on the board of directors of OJSC Professional Telecommunications, OJSC Dalsvyaz, OJSC Volgatelecom, OJSC CenterTelecom and CJSC Radiotel. From 2001 to
2004, he served as General Director of OJSC Professional Telecommunications. Mr. Degtyarev graduated from the Omsk Institute of Railway Transport with a degree in Engineering Science. In 2000,
he graduated from the Department of Economics and National Economy Management of St. Petersburg University of Economics and Finance with a degree in Economics.

Anatoly A. Gavrilenkohas been a member of our Board of Directors since June 2007. Since 2004, he has served as General Director and
member of the board of directors of CJSC Leader. From 1998 to 2004, he served as Director for Strategic Financial Planning at CJSC Alor-Invest. He also serves as member of the board of
directors of OJSC Moscow Heating Network Company, OJSC Moscow United Electric Network Company, OJSC Utility Management Company, OJSC Unite Machinebuilding Factories, CJSC Gazprombank and OJSC
VolgaTelecom. Mr. Gavrilenko graduated from the Moscow State University with qualifications of economist-mathematician and lawyer.

Alexander N. Kiselevhas been a member of our Board of Directors since June 2005. Since June 2006, Mr. Kiselev has served as the
General Director and Chairman of the Management Board of Svyazinvest. From December 2004 to June 2006, he served as Undersecretary of the Ministry of Information Technologies and Communications of the
Russian Federation. From 2000 to 2004, he served as Deputy and then as First Deputy Minister of Information Technologies and Communications. Mr. Kiselev also serves as chairman of the board of
directors of OJSC CenterTelecom, OJSC North-West Telecom and NPF Telecom-Soyuz, and as a member of the board of directors of OJSC MGTS and OJSC Sibirtelecom. Mr. Kiselev graduated
from the Eastern Studies Faculty of St. Petersburg State University.

Sergey I. Kuznetsovhas been a member of our Board of Directors since June 2005. In 2006, he served as Adviser to the General Director of
Svyazinvest. From 2004 to December 2006, he served as First Deputy General Director of Svyazinvest. From November 2003 to 2004, he served as General Director and chairman of the management board of
OJSC North-West Telecom. From 2001 to November 2003, he held the position of our General Director and Chairman of our Management Board. From 1998 to 2001, Mr. Kuznetsov served as
General Director of CJSC PeterStar, and from 1995 to 1998, he was the General Director of OJSC Telecominvest. He also serves as chairman of the board of directors of OJSC Volgatelecom and as a member
of the board of directors of OJSC CenterTelecom and OJSC Sibirtelecom. Mr. Kuznetsov graduated from North-West Polytechnic Institute and has studied business administration at
Columbia University and Fuqua Business School at Duke University.

Yevgeny I. Logovinskyhas been a member of our Board of Directors since June 2007. From March to May 2006, he served as Deputy General
Director and since May 2006 has been serving as Deputy

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Chairman
of the Management Board at OJSC SOGAZ. From 2004 to 2006, he served as Deputy General Director for Economics and Finance at CJSC Leader. From 2001 to 2004, he served as Manager in the audit
section at CJSC PriceWaterhouseCoopers Audit. He also serves as a member of the board of directors of CJSC Leader, CJSC Energoinvest-ME and SK Neftepolis LLC. Mr. Logovinsky
graduated from the Moscow State Management Academy in 1994 with a degree in Economics.

Nikolai L. Mylnikovhas been a member of our Board of Directors since June 2007. Since 2003, he has served as Director of the Legal
Department at CIT Finance Investment Bank (OJSC). From 2004 to 2005, he served as General Director at OJSC Magistral Finance Leasing Company. He also serves as a member of the board of directors of
OJSC CIT Finance Europe and NPF Promagrofund. Mr. Mylnikov graduated from St. Petersburg State University with a degree in Law.

Elena P. Selvichhas been a member of our Board of Directors since June 2006. Since December 2006, she has served as Executive
DirectorDirector of Economic and Finance Department of Svyazinvest. From September 2005 to December 2006, she served as Director of the Finance Department of Svyazinvest. From 2003 to
2005, she served as Finance Director of CJSC Petersburg Transit Telecom and, from 1999 to 2003, as Deputy General Director on Economics and Finance of CJSC Best Ceramics. She also serves as a member
of the board of directors of OJSC CenterTelecom, OJSC Southern Telecom Company and CJSC STARTCOM. Ms. Selvich graduated from St. Petersburg University of Economics and Finance in 1998
with a degree in Economics.

Maxim Yu. Tsyganovhas been a member of our Board of Directors since June 2007. Since 2006, he has served as General Director
at LLC CIT Finance and, since 2004, as Managing Director at CIT Finance Investment Bank (OJSC). From 2002 to 2006, he served as General Director at CJSC LenRosInvest. He also serves as member
of the board of directors of CIT Finance Investment Bank (OJSC), OJSC CenterTelecom and OJSC Magistral Finance Leasing Company. Mr. Tsyganov graduated from St. Petersburg State Economics
and Finance Institute in 1994 with degree in Economics.

Yekaterina O. Vasilyevahas been a member of our Board of Directors since June 2007. Since 2006, she has served as Director of the
Corporate Finance Department at CIT Finance Investment Bank (OJSC). From 2004 to 2006, she served as Vice President of the Corporate Finance Department at CIT Finance Investment Bank (OJSC). From 2003
to 2004, she served as Senior Expert in the Corporate Finance Section at LINKS Finance LLC. From 2002 to 2003, she served as Senior Expert in the Corporate Finance Section at Gamma
Group LLC. Ms. Vasilyeva graduated from the Dnepropetrovsk State University in 1995 with a degree in practical psychology.

All
of our directors were elected on June 14, 2007. Their term will expire on the date of our next annual shareholders' meeting, which will take place in June 2008. See
"Item 8. Financial InformationB. Significant changes" for additional information.

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Management Board

As of the date of this annual report, our Management Board consisted of the following persons:

|Name                    |  | Position                                                              |  | Year of Birth
|----------------------- |  | --------------------------------------------------------------------- |  | -------------
|Vladimir V. Terekhov(1) |  | Acting General Director, First Deputy General Director                |  | 1958         
|Andrei A. Gaiduk        |  | First Deputy General DirectorFinance Director                        |  | 1973         
|Yevgeny V. Gerasimov    |  | Deputy General DirectorDirector of the North-West Branch             |  | 1965         
|Vladimir K. Mironov     |  | Deputy General Director                                               |  | 1956         
|Sergey L. Akopov        |  | Director of Administrative Department                                 |  | 1953         
|Andrei Yu. Baklykov     |  | Director of IT Department                                             |  | 1968         
|Dmitry M. Gurevich      |  | Director of Project Management Department                             |  | 1971         
|Roman A. Frolov         |  | Chief Accountant                                                      |  | 1976         
|Rodion S. Levochka      |  | Director of Products and Marketing Department                         |  | 1976         
|Olga N. Rumyantseva     |  | Director of Sales and Customer Service Department                     |  | 1973         
|Galina V. Rysakova      |  | Director of Organizational Development and Human Resources Department |  | 1967         
|Dmitry V. Sigalov       |  | Director of Legal Affairs Department                                  |  | 1973         

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Vladimir V. Terekhovhas served as our Acting General Director since November 5, 2007, and
as our First Deputy General Director since November 2003. He also serves on the board of directors of CJSC Rustel, CJSC GlobalTel and OJSC RTComm.RU. From April 2002 to November 2003,
Mr. Terekhov served as our Deputy General DirectorTechnical Director. From 1994 through 2002, he worked as engineer and later occupied executive positions at CJSC PeterStar and
CJSC Petersburg Transit Telecom. Mr. Terekhov graduated from the Kiev Higher Military Engineering Communications School with a degree in Radiocommunications.

Andrei A. Gaidukhas served as our First Deputy General DirectorFinance Director since July 2006. From July 2004 to July
2006, he served as our Deputy General DirectorFinance Director. Prior to joining us, Mr. Gaiduk held the position of Chairman of the Management Board of the Russian Industrial Bank
since September 2002. From 1998 to 2002, he held several executive positions in the banking industry. He also serves as a member of the board of directors of CJSC GlobalTel, OJSC RTComm.RU, OJSC
MMTS-9, CJSC MTs NTT, CJSC Zebra Telecom and CJSC Globus Telecom. Mr. Gaiduk graduated from St. Petersburg University of Economics and Finance in 1995 with a degree
in Finance.

Eugeny V. Gerasimovhas served as our Deputy General DirectorDirector of North-West Branch since October 2001.
Since 1991, he has held several positions at the North-West Branch, including Engineer, Chief Engineer, Deputy Head of the Production
Department and First Deputy Head of the Territorial Unit No. 4. Mr. Gerasimov graduated from the Professor Bonch-Bruevich Leningrad Electrotechnical Institute of Communications in 1987
with a degree in Radiocommunications and Broadcasting.

Vladimir K. Mironovhas served as our Deputy General Director since March 2002. In 2001 to 2002, he served as the director for working
conditions and security at CJSC PeterStar. Mr. Mironov graduated from the Leningrad Institute of Railway Engineers in 1978 with a degree in Railway Electrification.

Sergey L. Akopovhas served as Director of our Administrative Department since February 2003. From April 2001, Mr. Akopov held the
positions of manager, deputy administrative director and administrative director at CJSC Petersburg Transit Telecom. He joined CJSC PeterStar in 2000. From

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1977
to 1998, Mr. Akopov served as a radio operator, and then as an economic manager, at the Baltic Shipping Company in St. Petersburg. Mr. Akopov graduated from the Leningrad
Maritime School of the Ministry of Sea Fleet in 1977 with a radio technician degree.

Andrei Yu. Baklykovhas served as Director of our IT Department since August 2005. Previously, he worked as Deputy Director of our IT
Department from 2003 to 2005, and as Head of Information Systems Development Department at CJSC Trans TeleCom in 2002. Mr. Baklykov graduated from the Kiev Higher School of Radio Engineering
with a degree in Radio Aids.

Dmitry M. Gurevichhas served our Director of Project Management Department since May 2003. Prior to joining us, Mr. Gurevich
worked at joint venture enterprise AT&T St. Petersburg and the St. Petersburg branch of CJSC Lucent Technologies. Mr. Gurevich graduated with honors from Professor Bonch-Bruevich
Leningrad Electrotechnical Institute of Communications in 1993 with a degree in Radio-engineering. He received an MBA from the St. Petersburg International Institute of Management in 1997 and a
Masters Certificate in project management from the George Washington University School of Business and Public Management in the United States.

Roman A. Frolovhas served as our Chief Accountant since February 2006. Since 2002, he has held several senior positions at Rostelecom,
including Tax Manager, Head of the Tax Department and Deputy Chief Accountant before being appointed Chief Accountant. Prior to joining us, he worked as an accountant at KPMG. Mr. Frolov
graduated from the Plekhanov Russian Academy of Economics in 1997 with a degree in Finance and Credit.

Rodion S. Levochkahas served as our Director of Products and Marketing Department since March 2007. From 2006 to 2007, he served as
Deputy General Director for Business Development at CJSC
Sinterra; from 2004 to 2006, he served as Deputy Director for Development at OJSC Telecominvest; from 2001 to 2004, he served as manager for marketing and business development at CJSC TeliaSonera
International Carrier Russia. Mr. Levochka graduated from the Moscow Power Engineering Insitute (Technical University) in 2000 with a degree in Computing Machinery.

Olga N. Rumyantsevahas served as our Director of Sales and Customer Service Department since July 2006. From 2004 to 2006, she served as
our Deputy Commercial Director and then Commercial Director. From 2002 to 2004, she worked as Sales Director at Sovintel LLC. Ms. Rumyantseva graduated from Stankin Moscow State
Technology University in 1996 with a degree in Computer-Aided Design Systems.

Galina V. Rysakovahas served as Director of our Organizational Development and Human Resources Department since September 2003.
Ms. Rysakova joined us as the Head of the Human Resources Department in December 2001. From 1989 to 2001, Ms. Rysakova worked at OJSC International Airport Sheremetyevo, where she
consecutively served as a senior engineer, head of a division within the Human Resources Department and Head of the Human Resources Department. She also serves as a member of the board of directors of
CJSC IC Costars. Ms. Rysakova graduated from the law faculty of Moscow State University in 1999.

Dmitry V. Sigalovhas served as Director of our Legal Affairs Department since July 2006. From 2002 to 2006, he served as Advisor to our
General Director for Legal Affairs and then as our Deputy General Director for Legal Affairs. Mr. Sigalov graduated from St. Petersburg State University in 1990 with a degree
in Law.

See
"Item 8. Financial InformationB. Significant Changes" for additional information.

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B.    Compensation

The members of our Board of Directors and Management Board were paid a total of RUR 149 million by us for all services performed by them during the
fiscal year ended December 31, 2006. This amount includes the annual salaries of the members of the Management Board, as well as other compensation paid in accordance with the internal
regulations of the Board of Directors and the Management Board. This amount also includes conditional and deferred salaries and compensations accrued for the year 2006, even if such salaries and
compensations are payable at a later date.

Our
directors do not receive salaries, bonuses or other payments from us unless they are also Management Board members. However, we pay fees to our directors in accordance with our
internal Regulations on the Board of Directors.

Currently,
we do not have a bonus or profit-sharing plan with respect to members of our Board of Directors or the Management Board, nor do we have an employee stock option program. See
"Item 6. Directors, Senior Management and EmployeesD. Employees" for additional information on remuneration and pension benefits provided by us.

In
accordance with the regulations of the FSFM, we are required to disclose information regarding the aggregate compensation of our directors and Management Board members. Such
information is included in quarterly reports submitted by us to the FSFM and is available to shareholders and to the general public on our website.

C.    Board Practices

Board of Directors

In accordance with our charter, our Board of Directors, which consists of 11 members, is elected by cumulative voting at the shareholders' meeting and remains in
office until the next annual shareholders' meeting (or extraordinary shareholders' meeting if one is called for purposes of voting for Board membership). Directors may serve on the Board an unlimited
number of times. The Board of Directors is responsible for our overall management, except matters reserved for the shareholders. See "Item 10. Additional InformationB. Description
of Charter Capital and Certain Requirements of Russian LegislationGeneral Shareholders' Meeting" for further information regarding the competence of the shareholders' meetings. The
members of our Board of Directors do not serve pursuant to a contract.

Pursuant
to our charter, meetings of the Board of Directors must be held at least quarterly. During 2006, our Board of Directors held 16 meetings (including through in-person
meetings and absentee voting).

Management Board

The Management Board is our collective executive body and, under the direction of the Chairman of the Management Board, is responsible for our
day-to-day management. The composition of the Management Board is determined by the Board of Directors based on the recommendations of the General Director. The General
Director or, in his absence, another person acting as General Director, serves as Chairman of the Management Board. The Management Board members are elected by the Board of Directors for a term of one
year, and may be re-elected an unlimited number of times. Members of the Management Board serve pursuant to contracts executed on our behalf by the General Director.

Members
of the Management Board are supervised by the Board of Directors and report to the Board of Directors. The Management Board, in particular, is responsible for the preliminary
discussion

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of
issues to be resolved at a shareholders' meeting and preparation of agenda items for the Board of Directors.

The
meetings of the Management Board may be held as often as necessary but not less frequently than once a month. During 2006, the Management Board held 19 meetings.

The
decisions of the Management Board are adopted by a simple majority of votes. Pursuant to our Regulations on the Management Board, it may adopt decisions if a quorum of at least half
of the appointed members is present at the meeting. In the event of a split vote, the Chairman of the Management Board has the decisive vote. No member of the Management Board can be a member of a
board of directors, a member of a management board or a general director of another company without the consent of the Board of Directors.

General Director

The General Director is appointed by our Board of Directors by a majority vote of the members of the Board of Directors participating in the meeting for a term of
no more than five years and may be reelected an unlimited number of times. The rights and duties, term in office, liability and compensation of the General Director are set forth in an agreement
between the General Director and us executed on our behalf by the Chairman of the Board of Directors or a person authorized by the Board of Directors. The Board of Directors may at any time terminate
the powers of the General Director.

Board Committees



The Audit Committee of the Board of Directors was established in December 2004 by a decision of the Board of Directors and functions pursuant to a charter
approved by the Board. It is currently comprised of three independent directors, Valery V. Degtyarev, Yevgeny I. Logovinsky (Audit Committee financial expert) and Yekaterina O. Vasilyeva, and one
non-independent, non-executive director, Elena P. Selvich, who has "observer" status without the power to vote on Audit Committee decisions.

The
goals and objectives of the Audit Committee, as set forth in its charter, are to assist the Board of Directors in carrying out its oversight responsibilities in the areas of:





The Nomination and Remuneration Committee of the Board of Directors was established in September 2003 by a decision of the Board of Directors and functions
pursuant to a charter approved by the Board. It is currently comprised of three independent directors: Mikhail A. Alexeev, Valery V. Degtyarev, and Nikolai L. Mylnikov.

The
goals and objectives of the Nomination and Remuneration Committee, as set forth in its charter, are to assist the Board of Directors in carrying out its oversight responsibilities in
the areas of:



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The Strategic Planning Committee of the Board of Directors was established in September 2003 by a decision of the Board of Directors and functions pursuant to a
charter approved by the Board. It is currently comprised of six members: Yevgeny A. Chechelnitsky, Andrei A. Gaiduk, Anatoly A. Gavrilenko, Sergey I. Kuznetsov, Elena P. Selvich and Yekaterina
O. Vasilyeva.

The
goals and objectives of the Strategic Planning Committee, as set forth in its charter, are to assist the Board of Directors in carrying out its oversight responsibilities in the
areas of:



Company Committees

Our Management Board currently has the following committees:

Tariff Committee

The main purpose of the Tariff Committee is to enhance our effectiveness in making tariff policy decisions required for the implementation of our business plans,
strategies and development programs. The main functions of the Committee include maintaining a flexible tariff policy aimed at realizing our marketing plan, organizing and optimizing sales promotions
and preparing proposals for our Management Board on the foregoing matters.

Budget and Investment Committee

The main purpose of the Budget and Investment Committee is to enhance our effectiveness in making budget and investment decisions required for the implementation
of our business plans, strategies and development programs, and our financial, business and tariff policies. The main functions of the Committee include maintaining a correlation and consistency
between the budgeting and

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investment
processes, control over compliance with those processes and preparation of proposals for our Management Board on the foregoing matters.

Compensation Committee

The purpose of the Compensation Committee is to create an effective compensation system designed to manage human resources so as to enhance our competitiveness.
The main function of the Committee is to maintain a correlation between the overall strategy of our development and our policies related to the payment of salaries and bonuses to our employees.

Information Disclosure Committee

The main purpose of the Information Disclosure Committee is to formulate and implement a uniform information policy consistent with applicable legal requirements,
as well as with our development strategy. The main functions of the Committee include maintaining consistency between our information policy and our strategy and development goals, enhancing the
accuracy and timeliness of our disclosure of information in accordance with applicable legal requirements and our internal regulations, as well as enhancing the conformity and consistency of
information publicly disclosed by us.

Tender Committee

The main purpose of the Tender Committee is to ensure that our Management Board makes effective decisions when selecting suppliers and contractors for goods and
services on a tender basis. The main functions of the Committee include defining the terms of tenders, reviewing commercial bids from
tender participants, selecting the winning bid and providing overall control, coordination and supervision in the preparation and conduct of tenders.

Internal Control Committee

The main purpose of the Internal Control Committee is the implementation and maintenance of effective internal controls over financial reporting. In addition, the
Internal Control Committee is responsible for the improvement of risk management procedures and providing assistance to the Management Board with respect to these issues. The primary functions of the
Internal Control Committee include developing, implementing and improving our internal controls over financial reporting to ensure effective controls by management, as well as providing assessments of
internal controls to our management and independent auditor.

Audit Commission

The Audit Commission verifies the accuracy of our financial reporting under Russian law, generally supervises our financial activity and performs certain internal
control functions. Pursuant to our charter, the Audit Commission is elected by the annual shareholders' meeting (or, as applicable, an extraordinary shareholders' meeting) for a term expiring on the
date of the next annual shareholders' meeting. Any shareholder or any other person nominated by shareholders may be a member of the Audit Commission provided that a member of the Audit Commission may
not simultaneously be the General Director, a member of the Board of Directors, a member of the Management Board or a member of the Liquidation Commission. The Audit Commission elects its Chairman and
Secretary. For the year ended December 31, 2006, we paid members of our Audit Commission a total of RUR 8,478,665.57.

Our
current Audit Commission was elected on June 16, 2007, and is comprised of the following members: Natalia Yu. Belyakova, Kirill V. Frolov, Olga G. Koroleva, Gennady I.
Kovalenko and Yekaterina S. Yerofteeva.

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Natalia Yu. Belyakova.Ms. Belyakova has served as an Audit Commission member since
June 16, 2007. Since 2006, she has served as the Deputy Director of the Economy and Finance Department of Svyazinvest. Ms. Belyakova graduated from St. Petersburg Forestry Academy
with qualifications of a
process engineer and in 2000 obtained an economist qualification at the Economics and Finance Institute.

Kirill V. Frolov.Mr. Frolov has served as an Audit Commission member since June 16,
2007. Since 2006, he has served as Head of the Internal Audit Department of Svyazinvest. Mr. Frolov graduated from the Plekhanov Russian Economics Academy where he specialized in accounting and
audit. In 2005, he graduated from the Moscow International Higher Business School Mirbis specializing in finance and credit.

Olga G. Koroleva.Ms. Koroleva has served as an Audit Commission member since June 24,
2006. Since 2005, she has served as Chief Accountant of Svyazinvest. Ms. Koroleva graduated from Tomsk State University with a diploma in Economics, and she also holds a Ph.D.
in Economics.

Gennady I. Kovalenko.Mr. Kovalenko has served as an Audit Commission member since
June 16, 2007. Since 2006, he has served as an advisor to Svyazinvest under a fixed-term employment contract. From 2003 to 2006, he served as Head of the Section for Relations with
Dependent Companies of Svyazinvest. Mr. Kovalenko graduated from the Higher Polytechnics College of the USSR Ministry of Interior (Leningrad) where he specialized in law.

Yekaterina S. Yerofteeva.Ms. Yerofteeva has served as an Audit Commission member since
June 16, 2007. Since 2001, she has served as Deputy Director of the Strategic Development Department and since October 2007, as Managing DirectorDirector of Strategic Development
Department of Svyazinvest. Ms. Yerofteeva graduated from Moscow Technical University of Communications and IT where she specialized in economy and management in the communications sector.

The
Audit Commission reviews our financial and business operations and, in particular: audits our financial and business documents; reviews the legal impact of agreements executed on our
behalf, transactions and settlements with counterparties; analyzes the accounting statements and statistical records for compliance with applicable regulations; checks whether payments to suppliers of
goods and services, payments to the budget, calculation and payments of dividends and redemption of other obligations are made accurately and in due course; audits our balance sheets and our profit
and loss statements; reports to the tax inspectorate and governmental authorities regarding accuracy and performs other functions related to financial issues. In the performance of its duties, the
Audit Commission has the right to request, and officers of our governing bodies must provide, documents on our financial and business operation, including confidential documents.

Upon
completion of the financial review, the Audit Commission issues a report which confirms that the data contained in our financial statements prepared in accordance with RAS is true
and correct and provides information on whether there were any violations of the legislation of the Russian Federation with respect to preparing the financial statements. All documents of the Audit
Commission (acts, opinions, instructions, etc.) must be executed by all members of the Audit Commission.

Members
of the Audit Commission are jointly and severally liable to us for the accuracy and reliability of each audit when they execute the acts, opinions or other documents on the basis
of the performed audit.

Corporate Governance Developments

We have undertaken to enhance our corporate governance standards by creating a number of committees under the control of our Board of Directors and our
Management Board and

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preparing a Corporate
Governance Code, a Code of Ethics, a Dividend Policy, an Insider Trading Policy and an Information Disclosure Policy, each of which has been approved by our
Board of Directors. All of these documents are available in English on our corporate website (http://www.rt.ru/en/icenter/administration/standard/).

Our
Corporate Governance Code sets forth the following principles underlying our corporate governance system:



See
"Item 16B. Code of Ethics" for a description of our Code of Ethics.

We
are required under the New York Stock Exchange listing rules to disclose any significant differences between the corporate governance practices that we follow under Russian
law and applicable listing standards and those followed by U.S. domestic companies under New York Stock Exchange listing standards. This disclosure is posted on our website
(http://www.rt.ru/en/centr-invest/corporate/corp_doc/).

D.    Employees

As of December 31, 2006, we employed 23,233 full-time employees (compared to 27,016 in 2003, 25,285 in 2004 and 23,634 in 2005).

As
of December 31, 2006, we employed 15,428 specialists with a higher and secondary education. Of our total employees, 35.3% were aged below 40, 29.8% were aged 40 to 50 and 34.9%
were aged over 50. The average monthly salary in 2006 was RUR 18,257, a 7.4% increase as compared to the average monthly salary in 2005.

As
of December 31, 2006, the breakdown of employees according to our branches (or geographic location) was as follows:

|Branch                                     |  | Employees as of December 31, 2006
|------------------------------------------ |  | ---------------------------------
|Central Branch (including Moscow branches) |  | 9,586                            
|North-West Branch                          |  | 2,441                            
|Volga Branch                               |  | 2,380                            
|Southern Branch                            |  | 1,631                            
|Ural Branch                                |  | 1,545                            
|Siberian Branch                            |  | 3,104                            
|Far East Branch                            |  | 2,546                            

As of the date of this annual report, we had no overdue wage payments to our employees and our management believes that we are in compliance with
all applicable labor laws. We have not experienced

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any
significant work stoppages since our formation and our management believes that we have good relations with our employees.

In
2006, approximately 6,000 of our employees were trained at foreign schools operated by manufacturers, at our educational centers or through training courses and seminars conducted by
various colleges and universities in Russia. Ten managers at our regional branches completed Master of Business Administration programs at the Moscow Technical University of Communications and
Information Technologies, and a number of our top managers participated in a training program provided by Deutsche Telecom.

Our
continuing education and personnel development plans for our employees, as well as promotion and compensation considerations, are made annually based on year end results.

Approximately
50.5% of our employees are members of the Telecommunications Union of Russia. In accordance with a uniform collective bargaining agreement between us and the Central
Committee of the Telecommunications Union of Russia, valid through 2008, all of our employees are guaranteed a minimum level of salaries and benefits, as well as acceptable working conditions.

Prior
to January 1, 1997, we did not have pension liabilities other than those payable under Russian law to the Russian government to provide funds for pension plans administered
by the state. On January 1, 1997, we adopted an additional non-state pension program for our employees, and, as described below, we currently have three non-state
employee pension programs in effect. The programs are administered pursuant to an agreement with NPF Telecom-Soyuz (the assignee of Rostelecom-Garantiya, which serviced this program before 2003), a
non-governmental pension fund. As of December 31, 2006, approximately 8,000 of our former employees received non-state pensions, and approximately 8,700 of our current
employees participate in the non-governmental pension funds.

The
first plan is a joint participation program that involves a fixed amount of contributions by us and a participating employee. Pension payments by us amount to RUR 100 per
month for each participating employee provided that such employee's monthly contribution is at least RUR 100. The pension is then disbursed to the participating employee upon his/her
retirement, though an employee has the right to withdraw from the plan earlier and receive only the funds contributed by him/her. The right to participate in the program is available to
full-time employees. As of December 31, 2006, 8,700 of our employees participated in this program.

The
other two programs involve pension benefits to our employees which are accounted for as defined benefit plans.



For
additional information, see Notes 24 and 33 to our consolidated financial statements.

Since
1995, we have provided medical insurance for employees and members of their families and accident insurance for all employees. We also contribute to the government social and
medical insurance funds and pension fund.

E.    Share Ownership

As of the date of this annual report, no member of our Board of Directors and Management Board owned our ordinary and/or preferred shares.

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Item 7.Major Shareholders and Related Party Transactions

A.    Major Shareholders

The only voting securities presently outstanding are our ordinary shares with a nominal value of RUR 0.0025 per share. The following table sets forth, as
of December 1, 2007, information with respect to the ownership of the outstanding ordinary shares by each person or entity that owns 5% or more of our ordinary shares.

|Person or Group                                                                |  | Number of Ordinary Shares Owned |  | %    
|------------------------------------------------------------------------------ |  | ------------------------------- |  | -----
|Svyazinvest                                                                    |  | 369,224,907                     |  | 50.67
|National Depositary Center, a non-commercial partnership, as a nominee holder  |  | 246,232,298                     |  | 33.79
|ING Bank (Eurasia) /ING DEPOSITARY ING Barings, as a nominee holder            |  | 54,482,296                      |  | 7.48 
|Depository Clearing Company, a closed joint stock company, as a nominee holder |  | 45,597,146                      |  | 6.26 
|Other holders in total                                                         |  | 13,159,673                      |  | 1.81 

Our ADSs, each representing six ordinary shares, are publicly traded on the New York Stock Exchange under the symbol "ROS." Each ADS is evidenced
by an ADR. JPMorgan Chase Bank, N.A. serves as the depositary for the sponsored ADR program, with ING Bank (Eurasia) serving as the custodian. As of December 1, 2007, 8,666,680 ADSs were
outstanding, representing 7.1% of our outstanding ordinary shares.

As
of the date of this annual report, we had a total of 728,696,320 ordinary shares issued and outstanding. As of April 27, 2007, the register of shareholders included 29
shareholders registered in the United States. They held 40,781,860 of our ordinary shares (5.6% of all ordinary shares) and 6,487,252 preferred shares (2.6% of all our preferred shares). Since certain
of these ordinary shares and ADSs were held by brokers or other nominees, the number of record holders in the United States may not be representative of the number of beneficial U.S. holders nor of
the place of residence of such beneficial holders. Svyazinvest is our biggest shareholder, holding 50.67% of our ordinary shares. The Russian government owns a controlling stake of 75% minus one share
of Svyazinvest.

The
Russian government has exercised, and is likely to continue to exercise, significant influence over our operation, and the increased involvement of the government in our management
and operations remains a possibility. Prior to April 1997, the Russian government directly owned 38% of our charter capital (i.e., ordinary and
preferred shares), representing 50.67% of our voting shares. On July 27, 1997, the government transferred its ownership interest in us to Svyazinvest, the holding company established by the
Ministry of Communications of the Russian Federation to consolidate the government's majority interests in various telecommunications companies throughout Russia. On the same date, the Russian
government also sold 25% plus one share of Svyazinvest at auction for approximately U.S.$1.87 billion to private investors. See "Item 3. Key InformationD. Risk
FactorsRisks Relating to the Control of us by Svyazinvest and the Government of the Russian Federation" for a description of certain risks relating to our ownership structure and the
potential change in control that would occur upon the government's sale of its stake in Svyazinvest.

In
addition to its indirect ownership stake in us, the Russian government also has general authority to regulate tariffs and regulates domestic long-distance tariffs. The
government also regulates the licensing of telecommunications services in Russia. In addition, the government is one of our significant customers, and any decrease in the government's utilization of
our network or in the tariffs charged for such utilization could have a material adverse effect on our results of operations.

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As
a statutory matter, all ordinary shares have equal rights, including voting rights.

Other
than in connection with the planned privatization of Svyazinvest, we are currently not aware of any existing arrangements that may cause a change of control over us.

B.    Related Party Transactions

As previously noted, we are controlled by Svyazinvest, which holds 50.67% of our voting shares, and representatives of Svyazinvest comprise a majority of our
Board of Directors. The government of the Russian Federation, in turn, holds 75% less one share of the voting capital of Svyazinvest and, therefore, ultimately controls us.

We
engage in various related party transactions, including with other companies controlled by Svyazinvest, such as the Interconnection Agreements, SPAs and Agency Agreements described in
"Item 10. Additional InformationC. Material ContractsAgreements regarding the new system of interaction between Russian operators and subscribers." We also provide
services and engage in other transactions with governmental entities or entities controlled by the government, as well with certain of our investees. For more information about related party
transactions, please refer to Note 27 to our consolidated financial statements. See also "Item 15. Controls and Procedures" for a description of certain material weaknesses in our
internal control over financial reporting, which included our failure to provide complete disclosure with respect to our related party transactions.

C.    Interests of Experts and Counsel

Not applicable.

Item 8.Financial Information

For information with regard to financial statements, see "Item 18. Financial Statements" and our consolidated financial statements included elsewhere in
this annual report.

A.    Consolidated Statements and Other Financial Information

8.A.7 Legal Proceedings

We are currently involved in various legal proceedings. We do not anticipate that the outcome of any of these legal proceedings will have a material impact on our
financial condition or results of operations. Other than as described below, we do not believe that any of these legal proceedings have arisen other than in the ordinary course of our business.



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As
of the date of this annual report, there have been no court proceedings involving a member of our Board of Directors or Management Board, or one of our affiliates acting as an
opposing party to us or our subsidiaries.

8.A.8 Policy on Dividend Distribution

The Joint Stock Companies Law provides that dividends on ordinary shares may be paid on a quarterly basis. Our charter provides that dividends may be paid on an
annual basis (although the relevant provisions of the Joint Stock Companies Law prevail). Annual dividends are proposed by our Board of Directors, based on our year-end statutory
accounting reports prepared in accordance with RAS and are approved by the annual shareholders' meeting, which is usually convened by the Board of Directors during the second quarter of each year. The
right to receive dividends is attributable only to shareholders included in the register of shareholders as of the record date, which was April 27, 2007, for dividends in respect
of 2006.

Under
Russian law, dividends payable to shareholders may not exceed the amount proposed by the Board of Directors. The decision on payment of dividends, as well as the amount and form of
the dividend payable, is adopted by the shareholders' meeting.

Dividends
payable on preferred shares are fixed by our charter in the amount of 10% of our net profits, based on our year-end statutory accounting reports, divided by the
total number of preferred shares. We may not pay dividends on ordinary shares unless dividends on preferred shares are paid in full. Furthermore, in the event the amount of dividends paid per ordinary
share exceeds dividends payable per preferred share, the shareholders' meeting should increase the amount of dividends per preferred share up to the amount of dividends per ordinary share.

Our
Dividend Policy is available in English on our corporate website at http://www.rt.ru/en/centr-invest/shar-services/dividends/. See also "Item 10. Additional
InformationB. Description of Charter Capital and Certain Requirements of Russian Legislation" for a further description of our ordinary and preferred shares and the payment of dividends
thereon.

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B. Significant Changes

The following significant changes have occurred relating to our investments in subsidiaries and associates since December 31, 2006, as well as to our share
registrar and management team:



In March 2007, we acquired through Westelcom, our wholly-owned subsidiary, a 25.99% stake in OJSC InfoTeX Taganrog Telecom from LLC InfoTeX Telecom for a
total cash payment of approximately RUR 24 million. As a result, we currently own indirectly a 99.99% stake in OJSC InfoTeX Taganrog Telecom.



As of December 31, 2006, our Board of Directors comprised:



On
June 16, 2007, Vladimir Bobin, Stanislav Panchenko, Irina Ragozina, Natalia Terentyeva, Valery Yashin, and Dmitry Yerokhin ceased to be members of our Board of Directors, and
the following individuals were elected to our Board of Directors:



As of December 31, 2006, our Management Board comprised:



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In
March 2007, Alexander I. Isaev ceased to be Deputy General DirectorDirector of MMT Branch and a member of our Management Board.

On
June 30, 2007, Anton Klimenko ceased to be a member of our Management Board.

On
July 1, 2007, Andrei Yu. Baklykov, Director of the IT Department; Rodion S. Levochka, Director of the Products and Marketing Department; Olga N. Rumyantseva, Director of the
Sales and Customer Service Department; and Dmitry V. Sigalov, Director of the Legal Affairs Department became members of our Management Board.

On
November 4, 2007, Dmitry Ye. Yerokhin's term as our General Director and Chairman of the Management Board expired.

On
November 5, 2007, Vladimir V. Terekhov became our Acting General Director.

See
Note 32 to our consolidated financial statements for additional information.

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Item 9.The Offer and Listing

A.    Listing Details

The table below shows the high and low prices and the daily average trading volumes of turnover in U.S. dollars of our ordinary shares on the RTS for the periods
set forth.

|     |  | Period                         |  | Highest price |  | Lowest price |  | Average volume
|---- |  | ------------------------------ |  | ------------- |  | ------------ |  | --------------
|2002 |  | Annual                         |  | 1.67          |  | 0.93         |  | 511,852       
|2003 |  | Annual                         |  | 2.24          |  | 1.12         |  | 414,710       
|2004 |  | Annual                         |  | 2.66          |  | 1.66         |  | 721,557       
|2005 |  | Annual                         |  | 3.28          |  | 1.70         |  | 982,648       
|2006 |  | Annual                         |  | 7.68          |  | 2.25         |  | 691,085       
|2005 |  | Quarter 1                      |  | 2.26          |  | 1.70         |  | 1,268,220     
|     |  | Quarter 2                      |  | 2.34          |  | 1.97         |  | 678,093       
|     |  | Quarter 3                      |  | 2.66          |  | 2.01         |  | 1,339,645     
|     |  | Quarter 4                      |  | 3.28          |  | 2.02         |  | 778,057       
|2006 |  | Quarter 1                      |  | 3.78          |  | 2.25         |  | 1,475,721     
|     |  | Quarter 2                      |  | 4.75          |  | 2.93         |  | 673,298       
|     |  | Quarter 3                      |  | 5.15          |  | 4.58         |  | 165,305       
|     |  | Quarter 4                      |  | 7.68          |  | 4.90         |  | 533,111       
|2007 |  | Quarter 1                      |  | 8.80          |  | 7.15         |  | 378,773       
|     |  | Quarter 2                      |  | 9.90          |  | 8.45         |  | 322,624       
|     |  | Quarter 3                      |  | 10.52         |  | 9.24         |  | 256,249       
|     |  | January                        |  | 7.91          |  | 7.15         |  | 663,483       
|     |  | February                       |  | 8.30          |  | 7.75         |  | 403,479       
|     |  | March                          |  | 8.80          |  | 7.65         |  | 271,776       
|     |  | April                          |  | 9.90          |  | 8.45         |  | 422,503       
|     |  | May                            |  | 9.35          |  | 8.65         |  | 322,244       
|     |  | June                           |  | 9.55          |  | 8.75         |  | 218,149       
|     |  | July                           |  | 9.90          |  | 9.35         |  | 381,218       
|     |  | August                         |  | 9.90          |  | 9.24         |  | 97,846        
|     |  | September                      |  | 10.52         |  | 9.85         |  | 300,947       
|     |  | October                        |  | 10.70         |  | 9.75         |  | 215,359       
|     |  | November                       |  | 10.80         |  | 9.60         |  | 1,135,577     
|     |  | December (through December 14) |  | 12.20         |  | 10.73        |  | 438,186       

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The table below shows the high and low prices and the daily average trading volumes of turnover in U.S. dollars of our ordinary shares on the
MICEX for the periods set forth.

|     |  | Period                         |  | Highest price |  | Lowest price |  | Average volume
|---- |  | ------------------------------ |  | ------------- |  | ------------ |  | --------------
|2002 |  | Annual                         |  | 1.68          |  | 0.91         |  | 4,565,243     
|2003 |  | Annual                         |  | 2.24          |  | 1.11         |  | 11,889,805    
|2004 |  | Annual                         |  | 2.67          |  | 1.65         |  | 17,495,025    
|2005 |  | Annual                         |  | 2.67          |  | 1.69         |  | 24,309,120    
|2006 |  | Annual                         |  | 7.80          |  | 2.22         |  | 34,481,511    
|2005 |  | Quarter 1                      |  | 2.26          |  | 1.69         |  | 26,236,063    
|     |  | Quarter 2                      |  | 2.35          |  | 1.96         |  | 19,541,979    
|     |  | Quarter 3                      |  | 2.67          |  | 1.98         |  | 31,773,173    
|     |  | Quarter 4                      |  | 2.62          |  | 2.02         |  | 21,109,928    
|2006 |  | Quarter 1                      |  | 3.85          |  | 2.22         |  | 67,869,061    
|     |  | Quarter 2                      |  | 4.84          |  | 2.89         |  | 43,246,573    
|     |  | Quarter 3                      |  | 5.25          |  | 4.33         |  | 14,535,709    
|     |  | Quarter 4                      |  | 7.80          |  | 4.73         |  | 16,512,026    
|2007 |  | Quarter 1                      |  | 8.88          |  | 7.01         |  | 15,566,262    
|     |  | Quarter 2                      |  | 10.06         |  | 8.34         |  | 15,798,544    
|     |  | Quarter 3                      |  | 10.55         |  | 9.22         |  | 21,011,411    
|     |  | January                        |  | 7.91          |  | 7.01         |  | 17,954,383    
|     |  | February                       |  | 8.56          |  | 7.59         |  | 15,230,664    
|     |  | March                          |  | 8.85          |  | 7.65         |  | 13,936,658    
|     |  | April                          |  | 10.06         |  | 8.38         |  | 18,969,578    
|     |  | May                            |  | 9.46          |  | 8.34         |  | 16,831,709    
|     |  | June                           |  | 9.63          |  | 8.67         |  | 11,384,137    
|     |  | July                           |  | 9.98          |  | 9.22         |  | 18,263,579    
|     |  | August                         |  | 9.96          |  | 9.25         |  | 21,054,304    
|     |  | September                      |  | 10.55         |  | 9.77         |  | 23,984,798    
|     |  | October                        |  | 11.11         |  | 9.64         |  | 19,398,614    
|     |  | November                       |  | 10.83         |  | 9.38         |  | 16,818,678    
|     |  | December (through December 14) |  | 12.25         |  | 10.65        |  | 24,086,384    

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The table below shows the high and low prices and the daily average trading volumes in U.S. dollars of our ADSs on the New York Stock
Exchange for the periods set forth.

|     |  | Period                         |  | Highest price |  | Lowest price |  | Average volume
|---- |  | ------------------------------ |  | ------------- |  | ------------ |  | --------------
|2002 |  | Annual                         |  | 9.89          |  | 5.33         |  | 80,132        
|2003 |  | Annual                         |  | 13.2          |  | 6.59         |  | 636,255       
|2004 |  | Annual                         |  | 15.92         |  | 9.96         |  | 992,933       
|2005 |  | Annual                         |  | 16.10         |  | 10.10        |  | 1,092,059     
|2006 |  | Annual                         |  | 46.45         |  | 13.37        |  | 2,800,105     
|2005 |  | Quarter 1                      |  | 13.30         |  | 10.10        |  | 1,753,980     
|     |  | Quarter 2                      |  | 14.06         |  | 11.71        |  | 470,711       
|     |  | Quarter 3                      |  | 16.10         |  | 12.00        |  | 1,044,492     
|     |  | Quarter 4                      |  | 15.80         |  | 11.95        |  | 1,077,618     
|2006 |  | Quarter 1                      |  | 22.70         |  | 13.37        |  | 2,358,828     
|     |  | Quarter 2                      |  | 29.24         |  | 17.52        |  | 3,309,245     
|     |  | Quarter 3                      |  | 31.92         |  | 27.42        |  | 2,203,481     
|     |  | Quarter 4                      |  | 46.45         |  | 29.20        |  | 2,981,384     
|2007 |  | Quarter 1                      |  | 53.40         |  | 42.55        |  | 4,734,292     
|     |  | Quarter 2                      |  | 59.99         |  | 50.16        |  | 2,324,039     
|     |  | Quarter 3                      |  | 63.47         |  | 55.50        |  | 2,396,664     
|     |  | January                        |  | 53.00         |  | 42.55        |  | 5,238,956     
|     |  | February                       |  | 50.40         |  | 46.05        |  | 3,713,747     
|     |  | March                          |  | 53.40         |  | 45.95        |  | 5,134,456     
|     |  | April                          |  | 59.99         |  | 51.00        |  | 2,599,628     
|     |  | May                            |  | 56.90         |  | 50.16        |  | 2,287,828     
|     |  | June                           |  | 57.67         |  | 52.65        |  | 2,099,508     
|     |  | July                           |  | 60.33         |  | 56.00        |  | 1,815,591     
|     |  | August                         |  | 60.50         |  | 55.50        |  | 2,721,274     
|     |  | September                      |  | 63.47         |  | 59.00        |  | 2,645,953     
|     |  | October                        |  | 65.05         |  | 58.00        |  | 4,898,873     
|     |  | November                       |  | 65.35         |  | 57.50        |  | 4,397,148     
|     |  | December (through December 14) |  | 71.55         |  | 65.00        |  | 6,696,843     

B.    Plan of Distribution

Not applicable.

C.    Markets

In Russia, our ordinary and preferred shares are listed on the RTS and the MICEX. ADSs, each representing six of our ordinary shares, are listed on the New York
Stock Exchange, and are also traded on the London Stock Exchange and the Deutsche Bourse.

D.    Selling Shareholders

Not applicable.

E.    Dilution

Not applicable.

F.    Expenses of the Issue

Not applicable.

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Item 10.Additional Information

A.    Share Capital

Not applicable.

B.    Description of Charter Capital and Certain Requirements of Russian Legislation

We describe below material provisions of our charter in effect on the date of this document and certain requirements of Russian legislation. In addition to this
description, we urge you to review our charter to learn its complete terms.

History and Purpose

We were registered with the Moscow Registration Chamber on September 23, 1993 under registration number 021.833.

In
2002, the Russian system for the registration of legal entities was significantly changed. Federal Law No. 129-FZ on the State Registration of Legal Entities and
Individual Entrepreneurs dated August 8, 2001, or the Registration Law, which entered into force on July 1, 2002, required legal entities to be registered by a registration agency
authorized by the government of Russia and
information concerning the establishment, reorganization and liquidation of legal entities to be entered in the state register. The Registration Law also required legal entities established prior to
July 1, 2002 to furnish, by the end of 2002, information specified in the Registration Law. Under Resolution No. 319 dated May 17, 2002, the government of Russia determined that
the Ministry of Taxes and Collections would be the state authority to register legal entities. In compliance with the Registration Law, on September 9, 2002, we obtained a Ministry of Taxes and
Collections Certificate Series 77 No. 004891969 on registration in the Unified State Register of Legal Entities, and we were allocated state registration number 1027700198767.

Article 3.1
of our charter provides that our main purpose is to earn a profit.

General Matters

Pursuant to our charter, we have the right to issue ordinary shares, preferred shares and other securities provided for by the legislation of the Russian
Federation with respect to securities. Our charter capital currently equals RUR 2,428,819.4725 and consists of 728,696,320 fully paid, issued and outstanding ordinary shares and 242,831,469
preferred shares, with all shares having an equal nominal value of 0.0025 rubles. We are also authorized to issue 905,330,221 ordinary shares and 531 preferred shares, all such shares having nominal
value of 0.0025 rubles. Under Russian legislation, charter capital refers to the aggregate nominal value of the issued and outstanding shares. None of our capital stock is under option or agreed
conditionally or unconditionally to be put under option. As of the date of this annual report, we had no treasury shares. The Joint Stock Companies Law requires us to dispose of any of our shares that
we acquire within one year of our acquisition or, failing that, reduce our charter capital.

According
to our charter, the Board of Directors is authorized to issue additional ordinary shares up to the total of authorized but unissued shares without obtaining further shareholder
approval. As of the date of this annual report, we had not issued any additional shares.

The
amount of our charter capital significantly exceeds the minimum requirement established by the laws of the Russian Federation for open joint stock companies. In the event that we
adopt a decision to decrease our charter capital in accordance with the Joint Stock Companies Law, our General Director must notify all of our creditors of such decrease within 30 days
following the decision of the shareholders to decrease the charter capital. The state registration of the relevant amendments

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to
our charter, which would be necessary for decreasing the charter capital, would be carried out only upon confirmation that such notification to the creditors has been made.

Rights Attaching to Our Shares

Shares of each category (ordinary shares and preferred shares) grant equal rights to the holders of shares of the respective category.

As
required by the Joint Stock Companies Law and our charter, all of our ordinary shares have the same nominal value and grant to their holders identical rights. Such rights generally
distinguish them from the holders of preferred shares. Holders of our ordinary shares, except for treasury shares, have the right to:



Our
preferred shares generally confer on their holders the following principal rights:



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While
there are no limits on admission of shareholders to shareholders' meetings, in accordance with our charter, only holders of our ordinary shares have the right to vote on any matter
within the competence of the meeting. Our preferred shares confer no voting rights unless our charter and the Joint Stock Companies Law provide otherwise. Holders of preferred shares are entitled to
vote on:



They
may also vote at shareholders' meetings following the shareholders' meeting at which a decision was adopted not to pay dividends on preferred shares or to pay them only in part.
Such right to vote continues until the dividends to which the holders of preferred shares are entitled are paid in full.

The
holders of both of our ordinary shares and preferred shares may:



Our
shareholders may also exercise other rights provided by Russian law and our charter.

Preemptive Rights

Our charter provides existing shareholders with a preemptive right to purchase shares or securities convertible into shares during an open subscription in an
amount proportionate to their existing shareholdings. In addition, the Joint Stock Companies Law provides shareholders with a preemptive right to purchase shares or securities convertible into shares
during a closed subscription if the shareholders voted against or did not participate in the voting on the decision approving such subscription. The preemptive right does not apply to a closed
subscription to existing shareholders provided that such shareholders may acquire a whole number of shares or securities convertible into shares being placed in an amount proportionate to their
existing holdings. We must provide shareholders with written notice of the proposed sale of shares at least 45 days prior to the offering, during which time shareholders may exercise their
preemptive rights.

Dividends

The Joint Stock Companies Law and our charter set forth the procedure for determining the dividends that we distribute to our shareholders. Dividends are
recommended to a shareholders' meeting by the Board of Directors, and approved by the shareholders' meeting by a majority vote. A decision on annual dividends must be taken at the annual general
shareholders' meeting. Our charter does not allow for the payment of quarterly dividends. The dividend approved at the shareholders' meeting may not be more than the amount recommended by the Board of
Directors. Dividends are

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distributed
to holders of our shares as of the record date for the shareholders' meeting approving the dividends. See "General Shareholders' MeetingNotice and Participation"
below. Dividends payable on preferred shares are fixed by the charter in the amount of 10% of our net profits, calculated in accordance with RAS, divided by the total number of preferred shares.
Furthermore, in the event the amount of dividends paid per common share exceeds dividends payable per preferred share, our shareholders should increase the amount of dividends per preferred share up
to the amount of dividends per common share. Dividends are not paid on treasury shares.

Distributions to Shareholders on Liquidation

Our charter does not provide for any distribution of our profits other than in the form of dividends. However, the charter provides that each of our shareholders
may receive a pro-rata portion of the assets upon our liquidation after the settlement of all of our outstanding debts (including payment of all outstanding taxes and salaries). In the
event that our assets are insufficient to pay the accrued but unpaid dividends and the liquidation value of the preferred shares to all holders thereof, the property will be distributed among holders
of preferred shares in proportion to the number of shares held by them.

Under
Russian legislation, liquidation of a company results in its termination without the transfer of rights and obligations to other persons as legal successors. The Joint Stock
Companies Law and our charter allow us to be liquidated:



Following
a decision to liquidate us, the right to manage our affairs would pass to a liquidation commission which, in the case of voluntary liquidation, is appointed by a shareholders'
meeting and, in an involuntary liquidation, is appointed by the court. Creditors may file claims within a period to be determined by the liquidation commission, but such period must not be less than
two months from the date of publication of notice of liquidation by the liquidation commission.

The
Civil Code of the Russian Federation, or the Civil Code, gives creditors the following order of priority during liquidation:



Claims
of creditors in connection with obligations secured by a pledge of the company's property ("secured claims") are satisfied out of the proceeds of sale of the pledged property
prior to claims of any other creditors except for creditors of the first and second priorities described above, provided that claims of such creditors arose before the pledge agreements in respect of
the company's property were made. To the extent that the proceeds of sale of the pledged property are not sufficient to satisfy secured claims, the latter are satisfied simultaneously with claims of
the fourth priority creditors as described above.

The
Federal Law on Insolvency (Bankruptcy), however, provides for a different order of priority for creditors' claims in the event of bankruptcy.

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The
remaining assets of a company are distributed among shareholders in the following order of priority:



Liability of Shareholders

The Civil Code and the Joint Stock Companies Law generally provide that shareholders in a Russian joint stock company are not liable for the obligations of a
joint stock company and bear only the risk of loss of their investment. This may not be the case, however, when one company is capable of determining decisions made by another company. The company
capable of determining such decisions is called an "effective parent." The company whose decisions are capable of being so determined is called an "effective subsidiary." The effective parent bears
joint and several responsibility for transactions concluded by the effective subsidiary in carrying out these decisions if:



Thus,
a shareholder of an effective parent is not itself liable for the debts of the effective parent's effective subsidiary, unless that shareholder is itself an effective parent of the
effective parent. Accordingly, a shareholder will not be personally liable for our debts or those of our effective subsidiaries unless such shareholder controls our business and the conditions set
forth above are met.

In
addition, an effective parent is secondarily liable for an effective subsidiary's debts if an effective subsidiary becomes insolvent or bankrupt resulting from the action or inaction
of an effective parent. This is the case no matter how the effective parent's capability to determine decisions of the effective subsidiary arises, such as through ownership of voting securities or by
contract. In these instances, other shareholders of the effective subsidiary may claim compensation for the effective subsidiary's losses from the effective parent that caused the effective subsidiary
to take any action or fail to take any action knowing that such action or failure to take action would result in losses.



We may increase our charter capital by:



A
decision on any issuance of shares or securities convertible into shares by closed subscription, or an issuance by open subscription of ordinary shares or securities convertible into
ordinary shares constituting 25% or more of the number of issued ordinary shares, requires a three-quarters majority vote of a shareholders' meeting. Otherwise, a decision to increase the charter
capital by increasing the nominal value of issued shares requires a majority vote of a shareholders' meeting. In addition, the issuance of shares above the number of authorized and
non-issued shares provided in our charter necessitates a charter amendment, which requires a three-quarters majority vote of a shareholders' meeting.

The
Joint Stock Companies Law requires that the value of newly issued shares be determined by the board of directors based on their market value but shall not be less than their nominal
value,

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except
in limited circumstances where (i) existing shareholders exercise a preemptive right to purchase shares at not less than 90% of the price paid by third parties, or (ii) fees of up
to 10% are paid to intermediaries, in which case the fees paid may be deducted from the price. The price may not be set at less than the nominal value of the shares. The board of directors and an
independent appraiser value any in-kind contributions for new shares.

Russian
securities regulations set out detailed procedures for the issuance and registration of shares of a joint stock company. These procedures require:



The Joint Stock Companies Law does not allow a company to reduce its charter capital below the minimum charter capital required by law, which is
RUR 100,000 for an open joint stock company. Our charter requires that any decision to reduce our charter capital, whether through the repurchase and cancellation of shares or a reduction in
the nominal value of the shares, be made by a majority vote of a shareholders' meeting. Additionally, within 30 days of a decision to reduce our charter capital, we must issue a written notice
to our creditors and publish this decision. Our creditors would then have the right to demand, within 30 days of such notice or publication, repayment of all amounts due to them, as well as
compensation for damages.

The
Joint Stock Companies Law and our charter allow our shareholders or our Board of Directors to authorize the repurchase of up to 10% of our shares in exchange for cash. The shares
repurchased pursuant to a board decision must be resold at the market price within one year of their repurchase or, failing that, the shareholders must decide to cancel such shares and decrease the
charter capital. The repurchased shares do not bear voting rights. The shares repurchased pursuant to a decision of our shareholders' meeting to decrease the overall number of shares, are cancelled at
their redemption.

The
Joint Stock Companies Law allows us to repurchase our shares only if, at the time of repurchase:



The
Joint Stock Companies Law and our charter provide that our shareholders may demand repurchase of all or some of their shares so long as the shareholder demanding repurchase voted
against or did not participate in the voting on the decision approving any of the following actions:



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We
may spend up to 10% of our net assets calculated under RAS on the date of the adoption of the decision which gives rise to the shareholders' right demand a share redemption. If the
value of shares in respect of which shareholders have exercised their right to demand repurchase exceeds 10% of the net assets, we will repurchase shares from each such shareholder on a
pro-rata basis.

Registration and Transfer of Shares

Russian legislation requires that a joint stock company maintain a register of its shareholders. Ownership of our registered shares is evidenced solely by entries
made in such register. Any of our shareholders may obtain an extract from the register certifying the number of shares that such shareholder holds. Since December 2005, United Registration Company,
which is the successor of Registrar-Svyaz, has maintained our share register.

The
purchase, sale or other transfer of shares is accomplished through registration of the transfer in the share register, or the registration of the transfer with a depositary if shares
are held by a depositary. The registrar or depositary may not require any documents in addition to those required by Russian legislation in order to transfer shares in the register. Refusal to
register the shares in the name of the transferee or, upon request of the beneficial holder, in the name of a nominee holder, is not allowed except in certain instances provided for by Russian
legislation, and may be challenged in court.

Reserve Fund

Russian legislation requires that each joint stock company establish a reserve fund to be used only to cover the company's losses, redeem the company's bonds and
repurchase the company's shares in cases when other funds are not available. Our charter provides for a reserve fund in the amount of 15% of our charter capital, funded through mandatory annual
transfers of at least 5% of our statutory net profits until the reserve fund has reached the required 15%.

Disclosure of Information

Pursuant to Russian securities legislation, we are required to make the following public disclosures and filings periodically:



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General Shareholders' Meeting



The powers of a shareholders' meeting are set forth in the Joint Stock Companies Law and in our charter. We hold an annual shareholders' meeting and extraordinary
shareholders' meetings pursuant to the charter and our Regulations on General Shareholders' Meetings. A shareholders' meeting may not decide issues that are not included in the list of its powers by
the Joint Stock Companies Law. Among issues that the shareholders have the exclusive power to decide are:



Voting
at a shareholders' meeting is generally based on the principle of one vote per common share, with the exception of the election of the Board of Directors, which is done through
cumulative voting. Decisions are generally passed by a majority vote of the voting shares present at a shareholders' meeting. However, Russian law requires a three-quarters majority vote of the voting
shares present at a shareholders' meeting to approve the following:



The
quorum requirement for our shareholders' meeting is met if shareholders (or their representatives) accounting for more than 50% of the issued voting shares are present. If the 50%
quorum requirement is not met, another shareholders' meeting with the same agenda may (and, in case of an annual shareholders' meeting, must) be scheduled and the quorum requirement is satisfied if

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shareholders
(or their representatives) accounting for at least 30% of the issued voting shares are present at that meeting.

The
annual shareholders' meeting must be convened by the Board of Directors between May 1 and June 30 of each year, and the agenda must include the following items:



A
shareholder or group of shareholders owning in the aggregate at least 2% of the issued voting shares may introduce proposals for the agenda of the annual shareholders' meeting and may
nominate candidates for the Board of Directors and the Audit Commission. According to our charter, any agenda proposals or nominations must be provided to us no later than 60 calendar days after the
preceding financial year end.

Extraordinary
shareholders' meetings may be called by the Board of Directors on its own initiative, or at the request of the Audit Commission, the independent auditor or a shareholder or
group of shareholders owning in the aggregate at least 10% of the issued voting shares as of the date of the request. Such requests shall be made in the manner and within time periods provided for in
the Regulations on the General Shareholders' Meetings. Such extraordinary meeting should be held not later than 40 days following the day when the request was made. However, if the proposed
agenda includes the election of our Board of Directors, such extraordinary shareholders' meeting should be held within 70 days following the day on which the request was made.

A
general meeting of shareholders may be held in a form of a meeting or by absentee ballot. The form of a meeting contemplates the adoption of resolutions by the general meeting of
shareholders through the attendance of the shareholders or their authorized representatives for the purpose of discussing and voting on issues of the agenda, provided that if the ballot is mailed to
shareholders for participation at a meeting convened in such form, the shareholders may complete and mail the ballot back to the
company without personally attending the meeting. A general meeting of the shareholders by absentee ballot envisages collecting shareholders' opinions on issues on the agenda by means of a
written poll.

The
following issues cannot be decided by a shareholders' meeting by absentee ballot:



All shareholders entitled to participate in a general shareholders' meeting must be notified of the meeting, whether the meeting is to be held in the form of a
meeting or by absentee ballot, no less than 30 days prior to the date of the meeting, and such notification shall specify the agenda for the meeting.

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However,
if it is an extraordinary shareholders' meeting to elect the Board of Directors, shareholders must be notified at least 70 days prior to the date of the meeting. Only those items that
were set out in the agenda to shareholders may be voted upon at a general shareholders' meeting.

The
list of shareholders entitled to participate in a general shareholders' meeting is to be compiled on the basis of data in the shareholders register on the date established by the
Board of Directors, which date may neither be earlier than the date of adoption of the board resolution to hold a general shareholders' meeting nor more than 50 days before the date of the
meeting (or, in the case of an extraordinary shareholders' meeting to elect the Board of Directors, not less than 35 days and not more than 65 days before the date of the meeting). Where
the proposed agenda includes issues that are to be voted by both holders of ordinary and preferred shares, the list of shareholders entitled to take part in such general shareholders' meeting should
be prepared as of the date at least 45 days prior to the date of the shareholders' meeting.

Under
our charter, shareholders entitled to participate in shareholders' meetings include (i) holders of our fully paid ordinary shares and (ii) holders of our fully paid
preferred shares (in the event there is a particular item in the meeting's agenda on which the preferred shares are entitled to vote or if holders of preferred shares became entitled to vote on all
issues within the competence of the shareholders' meeting due to a decision not to pay dividends in whole or in part on preferred shares).

The
right to participate in a general meeting of shareholders may be exercised by a shareholder as follows:



We
are required to grant to our shareholders access to information, including our annual report, audited financial statements (balance sheet and profits and loss statement) and auditor's
report, information on candidates to the Board of Directors, and any draft amendments or modifications to our charter, in advance of the shareholders' meeting. Shareholders may participate in a
shareholders' meeting either in person or by proxy.

Board of Directors

The Joint Stock Companies Law and our charter provides for the election of the entire Board of Directors at each annual general shareholders' meeting. The Board
of Directors is elected through cumulative voting, as provided for in the Regulations on the General Shareholders' Meeting and the Regulations on the Board of Directors, or the Board Regulations.
Under cumulative voting, each shareholder may cast an aggregate number of votes equal to the number of shares held by such shareholder multiplied by the number of persons on the Board of Directors,
and the shareholder may give all such votes to one candidate or spread them between two or more candidates. Before the expiration of their term, the directors may be removed as a group at any time
without cause by a majority vote of a shareholders' meeting. While there is not any age limit set for the retirement of directors, each member of the Board of Directors may at any time resign
voluntarily with a written notice to all other members of the Board of Directors and to us. In such event, the authority of the remaining members of our Board of Directors will not terminate. However,
in the event that the membership of the Board of Directors falls below the half of its initial membership, the Board of

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Directors
must adopt a decision to convene an extraordinary shareholders' meeting to elect a new Board of Directors.

Our
charter provides that Management Board members may not constitute more than one quarter of the Board of Directors and that the General Director may not also be the Chairman of the
Board of Directors. The Chairman of the Board of Directors is elected by a simple majority of the members of the Board of Directors and may be re-elected at any time by members of the
Board of Directors.

The
Joint Stock Companies Law requires at least a five-member Board of Directors for all joint stock companies, at least a seven-member Board of Directors for a joint stock
company with more than 1,000 holders of voting shares, and at least a nine-member Board of Directors for a joint stock company with more than 10,000 holders of voting shares. Only natural
persons (as opposed to legal entities) are entitled to sit on the Board. Members of the Board of Directors are not required to be our shareholders. The actual number of directors is determined by our
charter or a decision of the shareholders' meeting. Our charter provides that the Board of Directors shall consist of eleven members.

The
Board of Directors may be convened by the Chairman of the Board of Directors on his/her own initiative or by request of any member of the Board of Directors, the Audit Commission,
our external auditor, the General Director or any shareholder or group of shareholders owning at least 2% of our voting shares. A quorum of the Board of Directors is reached if more than half of the
elected members
are present at the meeting. Each member of the Board of Directors has one vote which may not be assigned to another member or any other person.

The
Joint Stock Companies Law generally prohibits the Board of Directors from acting on issues that fall within the exclusive competence of the general shareholders' meeting. Our Board
of Directors has the power to perform our general management, and to decide, among others, the following issues:



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Our
charter generally requires a majority vote of the directors present for an action to pass, with the exception of actions for which Russian legislation requires a unanimous vote or a
majority vote of the disinterested and independent directors, as described therein. A Board meeting is considered duly assembled and legally competent to act when half of the number of elected
directors is present.

Pursuant
to our charter, any issues concerning the legal status of our Board of Directors that are not covered by the charter shall be governed by the Board Regulations adopted by the
shareholders' meeting by a simple majority of votes of shareholders participating in the meeting.

Interested Party Transactions

Under the Joint Stock Companies Law, certain transactions defined as "interested party transactions" require approval by disinterested directors or shareholders
of the company. "Interested party transactions" include transactions involving a member of the Board of Directors or member of any executive body of the company (including the company's chief
executive officer and/or the company's managing organization), any person that owns, together with any affiliates, at least 20% of a company's issued voting stock or any person who is able to direct
the actions of the company, if that person and/or that person's spouse, parents, children, adoptive parents or children, brothers or sisters or affiliates, is/are:



The
Joint Stock Companies Law requires that an interested party transaction by a company with more than 1,000 shareholders be approved by a majority vote of the independent directors of
the company who are not interested in the transaction. For purposes of this rule, an "independent director" is a person who is not, and within the year preceding the decision to approve the
transaction was not, the general director, a member of any executive body or an affiliate of the company, or a member of the Board of Directors or of any management body of the company's management
organization.

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Additionally,
such person's spouse, parents, children, adoptive parents or children, brothers or sisters may not occupy positions in the executive bodies of the company or its management organization.
For companies with 1,000 or fewer shareholders, an interested party transaction must be approved by a majority vote of the directors who are not interested in the transaction if the number of these
directors is sufficient to constitute a quorum.

Approval
by a majority of shareholders who are not interested in the transaction is required if:



Approval
of an interested party transaction may not be required until the next annual shareholders' meeting if such transaction is substantially similar to transactions concluded by the
company and the interested party in the ordinary course of business before such party became an interested party with respect to the transaction.

The
approval of interested party transactions is not required in the following instances:



If
all members of the Board of Directors are deemed to be interested in the transaction and/or are not independent directors, the transaction is required to be approved by the
shareholders' meeting by a simple majority vote of shareholders.

As
we currently have over 1,000 shareholders holding voting shares in us, decisions on the approval of interested party transactions are typically adopted by our Board of Directors by a
majority of votes of disinterested (i.e., who do not have an interest in the transaction) independent directors.

Major Transactions

The Joint Stock Companies Law defines a "major transaction" as a transaction, or a series of transactions, involving the acquisition or disposal, or the
possibility of disposal (whether directly or indirectly) of property having the value of 25% or more of the balance sheet value of the assets of a company as determined under RAS, with the exception
of transactions conducted in the ordinary

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course
of business or transactions involving the placement of ordinary shares, or securities convertible into ordinary shares. Major transactions involving assets ranging from 25% to 50% of the
balance sheet value of the assets of a company require unanimous approval by all members of the Board of Directors or, failing to receive such approval, a simple majority vote of a shareholders'
meeting. Major transactions involving assets in excess of 50% of the balance sheet value of the assets of a company require a three-quarters' majority vote of a shareholders' meeting.

Change in Control



Russian legislation requires the following:



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The
above rules may be supplemented through rulemaking by the FSFM, which may result in a wider, narrower or more specific interpretation of these rules by the government and judicial
authorities, as well as by market participants.

Approval of the Russian Federal Anti-Monopoly Service

Pursuant to the Federal Law on Competition, acquisitions of voting stock capital of a joint stock company involving (1) companies with a combined value of
assets or annual revenues exceeding a certain threshold under RAS, or (2) companies registered as having more than a 35% share of a certain commodity market, and which would result in a
shareholder (or a group of affiliated shareholders) holding more than 25%, 50% or 75% of the voting capital stock of such company, or in a transfer between such companies of assets or rights to
assets, the value of which exceeds a certain amount, are subject to approval in advance by the FAS.

Disclosure of Ownership

Under Russian law, a holder of our ordinary shares will be required to publicly disclose an acquisition of 5% or more of the issued ordinary shares of the
company, as well any change in the amount of ordinary shares held by such holder, if, as a result of such change, the percentage of ordinary shares held by the holder becomes greater or lesser than
5%, 10%, 15%, 20%, 25%, 30%, 50% or 75% of the issued ordinary shares of the company.

Notification of Foreign Ownership

Foreign persons registered as individual entrepreneurs in Russia and foreign companies, regardless of whether they are registered with the Russian tax authorities
that acquire shares in a Russian joint stock company may need to notify the Russian tax authorities within one month following such acquisition. However, the procedure for notifying the Russian tax
authorities by foreign companies that are not registered with the Russian tax authorities at the time of their share acquisitions is unclear.

C.    Material Contracts

The following summarizes our material contracts, other than contracts entered into in the ordinary course of business, for the two years prior to the date of
filing this annual report. Since the following is
only a summary, you are urged to review the material contracts filed as exhibits to this annual report (or incorporated by reference) to learn their complete terms.

Agreements regarding our interest in Golden Telecom, Inc.

On March 29, 2002, our Board of Directors decided to terminate our participation in Limited Liability Company EDN Sovintel, or Sovintel, a Russian company
engaged in providing integrated telecommunications and Internet services. We sold our interest in Sovintel's charter capital pursuant to a Sale and Purchase Agreement among us,
SFMT-CIS, Inc., a U.S. subsidiary of Golden Telecom, and LLC Teleross, a Russian subsidiary of Golden Telecom. In exchange for our 50% interest in Sovintel's charter
capital, we received 15% of Golden Telecom's shares, $10 million in cash and $46 million in non-interest bearing promissory notes issued
by LLC Teleross payable 90 days after the date of the transfer of shares. These promissory notes were guaranteed by Golden Telecom and were paid in full on the expiration date. In
addition, we became a party to (i) a Shareholders Agreement and Standstill Agreement between Golden Telecom and its shareholders, including us, Alfa Telecom Limited, or Alfa Telecom, a British
Virgin Islands company, Capital International Global Emerging Markets Private Equity Fund, L.P., or Capital International, a Delaware limited partnership, Cavendish Nominees Limited, or
Cavendish, a limited liability company organized under the laws of Guernsey, and First NIS Regional Fund SICAV, or First NIS, a private institutional fund registered under the laws of Luxembourg, and
(ii) a Registration Rights Agreement between us and Golden Telecom. The

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transaction
was reflected in our financial statements for the year ended December 31, 2002. The sale of our stake in Sovintel and acquisition of shares of Golden Telecom was completed on
September 5, 2002. The proceeds from the sale of the 50% interest in Sovintel were used by us to reduce our external indebtedness.

On
August 19, 2003, Nye Telenor East Invest AS (Norway), or Telenor, SFMT-CIS, Inc. and Golden Telecom entered into a Stock Swap Agreement whereby
(i) SFMT-CIS, Inc. acquired from Telenor a 100% interest in Comincom which, in turn, holds a 100% interest in Combellga and (ii) Golden Telecom issued shares in favor
of Telenor constituting approximately 19.5% of Golden Telecom's charter capital. One of the conditions to the closing of the Stock Swap Agreement was the execution of a restated Shareholders
Agreement, Standstill Agreement and Registration Rights Agreement.

On
August 19, 2003, we, along with Telenor, as a new shareholder, Golden Telecom, Alfa Telecom, Capital International, Cavendish and First NIS executed a restated
Shareholders Agreement, Standstill Agreement and Registration Rights Agreement. The restated versions of these agreements preserve our legal status as a major shareholder of Golden Telecom as
specified in the Shareholders Agreement, the Standstill Agreement and the Registration Rights Agreement, each dated September 5, 2002. The
restated versions of the agreements were approved by our Board of Directors on September 16, 2003 and came into force on December 1, 2003. The Standstill Agreement expired on
June 1, 2005.



The Shareholders Agreement was signed on September 5, 2002 for a term of three years, and extended in 2003. It provided that: (i) any shareholder
whose interest is reduced to less than 1.5% of placed common shares shall cease to be a party to the Shareholders Agreement; (ii) in the event Alfa Telecom, the biggest shareholder, transfers
shares to any third parties and, as a result of such transfer, such third parties hold at least one-third of Golden Telecom's issued and outstanding shares, the other shareholders who are
party to the Shareholders Agreement will acquire rights to sell to such third parties, a pro rated portion of their shares at the same price and on the same terms as those governing the sale of Alfa
Telecom's shares to such third parties; (iii) the board of directors will consist of nine members nominated by the major shareholders in accordance with their proportional interests (we may
appoint two nominees to the board of directors, one of whom is required to be an independent director with financial expertise); (iv) if our interest in Golden Telecom falls below 10%, then the
number of Rostelecom-appointed directors will be reduced to one; and (v) in relation to the directors' approval of a transaction or a series of interrelated transactions directly or indirectly
connected with property with a value in excess of 5% of the aggregate consolidated value of the assets of Golden Telecom and its subsidiaries, any two directors of the company have the right to
postpone such approval for 45 days and to engage an independent consultant to examine the merit of such transactions for Golden Telecom.

The
restated Shareholders Agreement was entered into by the shareholders of Golden Telecom for an indefinite term. The restated Shareholders Agreement makes certain amendments and
additions to the original Shareholders Agreement including, among others, that: (i) any shareholder whose interest falls below 3% of Golden Telecom's issued and placed shares shall cease to be
a party to the restated Shareholders Agreement; (ii) the restated Shareholders Agreement shall cease to apply in the event a shareholder acquires an interest of greater than 50% of Golden
Telecom's charter capital; (iii) the board of directors shall consist of ten members (the number of directors may be increased at any time by the board of directors); (iv) if our
interest falls below 10%, the number of Rostelecom-appointed directors is to be reduced in accordance with the terms of the restated Shareholders Agreement (for two years following the entry into
force of the restated Shareholders Agreement, we retain the right to appoint two directors provided our interest in Golden Telecom's charter capital equals at least 10%); (v) the sale of a 10%
interest in Golden Telecom by a shareholder to a third party is subject to the preemption rights of other shareholders holding at least a 10% interest in Golden Telecom; and (vi) no

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shareholder
may acquire a 50% or greater interest in Golden Telecom unless such acquisition is by way of a tender offer to other shareholders. However, our right to appoint two members of the Board of
Directors expired on December 1, 2005. Accordingly, we must submit our candidates to the Board of Directors through the ordinary nomination process without any guarantee that the individuals we
nominate will be elected. On May 18, 2006, the annual shareholders' meeting did not elect to the Board of Directors of Golden Telecom the candidate nominated by us. As of the date of this
annual report, our management is seeking opportunities to regain the right to appoint members to Golden Telecom's Board of Directors.



The Registration Rights Agreement was signed on September 5, 2002, and extended in 2003. It provided that: (i) Golden Telecom is required to
register, at its own cost and expense and at our request, a block of our shares in Golden Telecom for the purposes of public placement in the United States. We are entitled to two registrations "on
demand," each in relation to a minimum of 1,000,000 shares, and (ii) we will be granted an additional registration of our shares in Golden Telecom if Golden Telecom registers, in its name,
authorized but unissued common shares in order to raise capital or Golden Telecom registers issued but unregistered common shares on instructions from other shareholders.

The
restated Registration Rights Agreement did not materially change the terms of the Registration Rights Agreement. The minimum number of shares that Golden Telecom is required to
register at our request was reduced from 1,000,000 to 500,000.

Restructuring of Our Obligations to Vnesheconombank

We entered into a JPY 11,601 million (RUR 3,089 million) credit agreement in August 1994 with the government of the Russian Federation
and Vnesheconombank. The principal of the loan was repayable in equal annual installments of JPY 2,105 million, with the final payment due not later than October 2001. The interest rate
was 3% per annum. Our payment obligations under this agreement were restructured in 2003 pursuant to an agency agreement entered into by us and Alfa Bank. Under this agreement, Alfa Bank
repaid the debt obligation under the original credit agreement, and we issued promissory notes to Alfa Bank for approximately $98.6 million at an interest rate of 5.94% per annum payable
in six equal semi-annual installments, to be redeemed within 36 months of the date of the agency agreement. On June 30, 2006, we redeemed all outstanding notes to
Alfa Bank.

Agreements regarding the new system of interaction between Russian operators and subscribers



Pursuant to the Law on Communications and the Interconnection Rules, we have entered into telecommunications network interconnection agreements with all operators
interconnected to our network. These agreements govern the legal relationships between the parties, define their respective rights and obligations, and sets forth the cost of services and the manner
in which the services are to be provided.

Because
we are considered an operator occupying a "significant position" in the market, the interconnection agreements must meet certain requirements established by law, including the
obligation to: (i) establish equal interconnection terms for operators providing similar services; (ii) publish the interconnection terms, including technical, economic and informational
provisions; and (iii) operate using the tariffs established by the FST.

Each
interconnection agreement we enter into with an IRC requires the IRC to provide traffic transit services (i.e., traffic
origination and termination services) via its own regional network and to provide us with certain information with respect to end users of our DLD and ILD services. In turn,

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we
are required to provide the IRC with interconnection transit services for traffic from mobile network operators transmitting traffic via the IRC's telecommunications network. Tariffs for the
transmission of mobile operator traffic is not regulated and, therefore, the price for these services is set by us.

Our
obligations under an interconnection agreement include: (i) providing interconnection services; (ii) paying for the provision of subscriber information;
(iii) accounting, billing and payment for traffic transit services; and (iv) ensuring quality of service. In addition, we are required to provide traffic transit services from mobile
cellular network operators transmitting traffic via the IRC's network.

The
IRC's obligations under the contract are to: (i) provide traffic transit services; (ii) pay for interconnection services; and (iii) supply numbering information
for the network for which our DLD and ILD services are provided.

Traffic
transit services differ according to the destination and place of transmission. When DLD and ILD services are provided to end users of an operator interconnected to an IRC's
network, the IRC provides us with call termination and origination services to or from the interconnected operator's network. When DLD and ILD telephone services are provided to an IRC's end users,
IRCs provide us with call termination and origination services to or from the IRC`s network. In this case, a compensation surcharge established by the regulatory authority is added to the cost of the
call origination.

Settlements
are conducted on the basis of information prepared by the parties in accordance with the terms of the agreement. We provide information on the volumes of interconnection and
traffic transit services. The IRC provides information on the numbering capacities of its own network and the networks of interconnected operators, and updated information on network subscribers. The
parties each prepare statements of services rendered, which are used to determine payment obligations. Each interconnection agreement sets out a procedure for resolving disputes.

These
agreements are concluded for a term of one year with the option to renew by mutual agreement of the parties. The agreements may also be terminated by mutual consent of the parties,
pursuant to a court decision or on other grounds provided for by applicable law. The full texts of the interconnection agreements entered into with IRCs are included as exhibits to this
annual report.

SPAs with IRCs

Prior to 2006, we were not required to bill and collect payments from end users for long-distance services or to provide other customer services
directly to end users throughout Russia. As a result, we did not have sufficient staff and other resources to process, prepare and analyze source documents, maintain information systems, issue bills
and collect payments by January 1, 2006 when the new regulations came into effect requiring us to provide DLD and ILD services directly to end users throughout Russia. We therefore
entered into a series of agreements that allow us to utilize the resources of other companies possessing the necessary capabilities, including, among others, the IRCs of Svyazinvest.

The
SPAs we entered into with IRCs are essentially agency agreements, under which the agent, for a fee, performs a number of functions associated with providing DLD and ILD services to
end users. Relations of the parties under the SPAs are subject to the Russian Civil Code, as well as regulations regarding the quality and procedures for providing DLD/ILD services to
end users.

Pursuant
to the SPAs, an IRC undertakes, for a fee, to perform the following services on our behalf: (i) collecting payments from subscribers; (ii) handling claims by
users; (iii) handling information requests from end users; (iv) accepting and handling orders through the order-based and direct service system; (v) processing billing for
communications services; (vi) preparing, printing, storing and delivering bills and payment documents to users; (vii) inform end users of our business name, as the

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operator
providing DLD and ILD services; (viii) keep records of communications services provided to end users; and (ix) record payments and amounts owed for services rendered. In
addition, under the SPAs, IRCs provide us with reports in accordance with the format required by us.

Under
these SPAs, we are required to establish and notify the IRC and end users of communications services tariffs, pay for services rendered under the agreements and issue powers of
attorney to the IRC's representatives authorizing them to perform legal and other actions.

The
settlements procedure under the SPAs is as follows: on a monthly basis, the IRC transfers funds received from end users for services rendered, which are recorded in the agent's
report and other report documents. The agent's fee is determined on the basis of the agent's report and paid to the IRC. To ensure correct settlements, rules are established for verifying compliance
by the IRC with the terms of the agreement.

Amounts
owed by end users for services rendered are considered our receivables. The agreements also define requirements for handling claims by users and establish the manner in which the
parties shall handle user claims and complaints in connection with the provision or non-provision of communications services.

For
the purpose of compliance with statutory accounting requirements, the IRC ensures the compilation of all necessary reporting and accounting documents, including sales ledgers and
purchase ledgers. For compliance with VAT legislation, the agreements include a special section describing the interaction of the parties.

The
agreements provide penalties to protect the parties from bad faith performance of obligations by the other party.

These
agreements are concluded for a term of one year with the possibility of renewal if the parties agree, and may be terminated by mutual consent of the parties, pursuant to a court
decision or on other grounds provided for by applicable Russian legislation.

The
full texts of the cooperation agreements entered into with IRCs are included as exhibits to this annual report.

Agency Agreements with IRCs

We entered into individual Agency Agreements with the IRCs, pursuant to which the IRC undertakes, on our behalf and at our expense, to enter into written
agreements for the provision of long-distance services with corporate users and SPAs with operators interconnected to the IRC's network.

These
agreements are concluded for a term of one year with the possibility of renewal if the parties agree, and may be terminated by mutual consent of the parties, pursuant to a court
decision or on other grounds provided for by applicable Russian legislation.

The
full texts of the agency agreements entered into with IRCs are included as exhibits to this annual report.

D.    Exchange Controls

The Federal Law on Currency Regulation and Currency Control effective since June 18, 2004 sets forth certain restrictions on settlements between residents
of Russia with respect to transactions involving foreign securities (including ADRs), including requirements for settlement in Russian rubles.

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Repatriation of Export Proceeds

Russian companies must repatriate 100% of their receivables from the export of goods and services (with a limited number of exceptions concerning, in particular,
certain types of secured financing) within seven days of the date on which they were received (also with a limited number of exemptions).

Restrictions on the remittance of dividends, interest or other payments to non-residents

The Federal Law on Foreign Investments in the Russian Federation of July 9, 1999, specifically guarantees foreign investors the right to repatriate their
earnings from Russian investments. However, the evolving Russian exchange control regime may materially affect your ability to do so.

Currently,
ruble dividends on common shares may be converted into U.S. dollars without restriction. However, the ability to convert rubles into U.S. dollars is also subject
to the availability of U.S. dollars in Russia's currency markets. Although there is an existing market within Russia for the conversion of rubles into U.S. dollars, including the
interbank currency exchange and over-the-counter and currency futures markets, the further development of this market is uncertain.

E.    Taxation

The following discussion describes the material United States federal and Russian income and withholding tax consequences to you if you are a U.S. holder
of ordinary shares or ADSs that is a "United States person," as the term is defined in the United States Revenue Code of 1986, as amended (the "Code") and a resident of the United States for purposes
of the Convention between the United States of America and the Russian Federation for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income and Capital
(the "United States-Russia income tax treaty") and are fully eligible for benefits under the United States-Russia income tax treaty. Subject to certain provisions of the United
States-Russia income tax treaty relating to limitations on benefits, you generally will be a resident of the United States for treaty purposes that is entitled to treaty benefits if you are:



The
benefits under the United States-Russia income tax treaty discussed in this document generally are not available to U.S. persons who hold ADSs or ordinary shares in connection
with the conduct of a business in the Russian Federation through a permanent establishment as defined in the United States-Russia income tax treaty. Subject to certain exceptions, a
U.S. person's permanent establishment under the United States-Russia income tax treaty is a fixed place of business through which such person carries on business activities in the Russian
Federation (generally including, but not limited to, a place of management, a branch, an office and a factory). Under certain circumstances, a U.S. person may be deemed to have a permanent
establishment in the Russian Federation as a result of activities carried on in the Russian Federation through agents of the U.S. person. This summary does not address the treatment of holders
described in this paragraph.

The
following discussion is based on:



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all
as in effect on the date of this document. All of the foregoing are subject to change, possibly on a retroactive basis, after the date of this document. This discussion is also based, in part, on
representations of the depositary, and assumes that each obligation in the deposit agreement and any related agreements will be performed in accordance with its terms. The discussion with respect to
Russian legislation is based on our understanding of current Russian law and Russian tax rules, which are subject to frequent change and varying interpretations.

We
believe, and the following discussion assumes, that for United States federal income tax purposes, we were not a passive foreign investment company for the taxable year ending in
2006, we will not be a passive foreign investment company for the current taxable year and we will not become a passive foreign investment company in the future. However, passive foreign investment
company determinations are made annually and may involve facts that are not within our control. If we were to be a passive foreign investment company, materially adverse United States federal income
tax consequences could apply to an investor who is a "United States person" as defined in the Code.

The
following discussion is not intended as tax advice to any particular investor. It is also not a complete analysis or listing of all potential United States federal or Russian income
and withholding tax consequences to you of ownership of ordinary shares or ADSs. We urge you to consult your own tax adviser regarding the specific United States federal, state, and local and Russian
tax consequences of the ownership and disposition of the ordinary shares or ADSs under your own particular factual circumstances.

Russian Income and Withholding Tax Considerations

The Russian tax rules applicable to U.S. holders are characterized by significant uncertainties and limited interpretive guidance. Russian tax authorities
have provided limited guidance regarding the treatment of ADS arrangements, and there can be no certainty as to how the Russian tax authorities will ultimately treat those arrangements. In 2005, the
Russian Ministry of Finance stated in some of its clarification letters that ADS holders must be treated as the beneficial owners of the underlying shares for purposes of the double tax treaty
provisions applicable to taxation of dividend income from the underlying shares. However, double tax treaty relief is available only if, before the transfer of dividends to the depository, the
depositary has provided the issuer with a list of ADS holders accompanied by each holder's tax residency certificate (confirmation of the country of tax residence). It is currently unclear whether
depositories will be willing or able to provide residency certificates for ADS holders or implement procedures for holders to benefit from applicable tax treaties. Thus, while a U.S. holder may
technically be entitled to benefit from the provisions of the United States-Russia income tax treaty, in practice such relief may be difficult, time consuming or impossible to obtain.

However,
if the Russian tax authorities were not to treat U.S. holders as the beneficial owners of the underlying shares, then the benefits discussed below regarding the United
States-Russia income tax treaty would not be available to U.S. holders. Russian tax law and procedures are also not well developed, and local tax inspectors have considerable autonomy and often
interpret tax rules without regard to the rule of law. Both the substantive provisions of Russian tax law and the interpretation and application of those provisions by the Russian tax authorities may
be subject to more rapid and unpredictable change than in jurisdictions with more developed capital markets.

Currently,
the Russian government is in the process of replacing the existing tax legislation with a comprehensive Tax Code, but it is unclear when this process will be completed and how
U.S. holders would be affected. As of January 1, 1999, Part 1 (General) of the Tax Code went into effect. This law defines the general principles of taxation in Russia, defines
the legal status of taxpayers and tax

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agencies
and determines general rules of tax filings and tax control, as well as procedures for challenging tax agencies. Part 1 also specifies all the taxes that can be imposed by federal and
local authorities. Further, on January 1, 2001, Part 2 of the Tax Code went into effect, providing a description of the most significant taxes.



Dividends paid to U.S. holders generally will be subject to Russian withholding tax at a 15% rate for legal entities and a 30% rate for individual holders.
This tax may be reduced to 5% to 10% under the United States-Russia income tax treaty for U.S. holders; a 5% rate applies for U.S. holders who are legal entities owning 10% or more of
the company's outstanding shares, and a 10% rate applies to dividends paid to U.S. holders, including individuals and legal entities, owning less than 10% of the company's outstanding shares.
See "United States-Russia Income Tax Treaty Clearance Procedures."

If
the appropriate documentation has not been provided to us before the dividend payment date, we are required to withhold tax at the full rate, and U.S. holders qualifying for a
reduced rate under the United States-Russia income tax treaty then would be required to file claims for refund within three years with the Russian tax authorities. There is significant uncertainty
regarding the availability and timing of such refunds.



U.S. holders generally should not be subject to any Russian income or withholding taxes in connection with the sale, exchange, or other disposition of ADSs
or ordinary shares outside of Russia if the shares or ADSs are not sold to a Russian resident. The terms "Russian residents" and "Russian purchasers" are considered to be either Russian legal entities
or permanent establishments of foreign legal entities located in Russia. Sales or other dispositions of ADSs or ordinary shares to Russian residents, however, may be subject to Russian income or
withholding taxes, and for such a sale by a U.S. holder, the Russian resident purchaser may be required to withhold 20% to 30% of any gain realized on the sale. However, there is no mechanism
by which a Russian purchaser would be able to effect this withholding upon purchasing ADSs from a U.S. holder in connection with the sale of ADSs on the New York Stock Exchange.

U.S. holders
may be able to claim the benefits of a reduced rate of withholding under the United States-Russia income tax treaty on the disposition of shares of ordinary shares or
ADSs to Russian residents, or obtain a refund of any withheld amounts at rates different from those provided in the treaty, by relying on the United States-Russia income tax treaty and complying with
the appropriate procedures described below.

Regardless
of the residence of the purchaser or eligibility to the treaty benefits, a U.S. holder which is a legal entity should not be subject to any Russian income or
withholding taxes in connection with the sale, exchange, or other disposition of ADSs if immovable property situated in Russia constitutes 50%
or less of our assets or if ADSs are sold to purchasers via foreign exchanges where they are legally circulated.



Under current rules, to claim the benefit of a reduced rate of withholding under the United States-Russia income tax treaty, a non-resident of Russia
generally must provide an official certificate of residence from the U.S. tax authorities confirming the eligibility for the treaty benefits. The Tax Code does not provide for any special form
of such certificate. The Russian tax authorities clarified that such certificate can be issued in the form established under the domestic law. Despite the fact that the Tax Code does not explicitly
require an apostille, recent court practice suggests that the certificate of residence must be apostilled under Convention de la Hayed u 5 octobre 1961.

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A U.S. holder may obtain the appropriate certification by mailing completed forms, together with the holder's name, taxpayer identification number, tax return form number and the
tax period for which certification is required, and other applicable information, to the United States Internal Revenue Service. The procedures for obtaining certification are described in greater
detail in the instructions to Internal Revenue Service Form 8802. As obtaining the required certification from the Internal Revenue Service may take at least six to eight weeks,
U.S. holders should apply for such certification as soon as possible.

If
tax is withheld by a Russian resident on dividends or other amounts at a rate different from provided in the tax treaty, a U.S. holder may apply for a tax refund by filing a
package of documents with the Russian local tax inspectorate to which the withholding tax was remitted within three years from the withholding date for U.S. holders which are legal entities,
and within one year from the end of the year in which the withholding occurred for individual U.S. holders. The package should include the appropriate form (1011DT (2002) for
non-dividend income and 1012DT (2002) for dividend income), certificate of residence of the foreign holder (IRS Form 6166), a copy of the agreement or other documents
substantiating the payment of income, documents confirming the beneficial ownership of the dividends recipient and the transfer of tax to the Russian revenue. Under the provisions of the Tax Code, the
refund of the tax should be effected within one month after the submission of the documents. However, procedures for processing such claims have not been clearly established, and there is significant
uncertainty regarding the availability and timing of such refunds.

Neither
the depositary nor us has or will have any obligation to assist an ADS holder with the completion and filing of any tax forms.

United States Federal Income Tax Considerations

The following is a general description of the material United States federal income tax consequences that apply to you if you are, for United States federal
income tax purposes, a beneficial owner of ADSs or ordinary shares who is a citizen or resident of the United States, a corporation (including any entity treated as a corporation for United States
federal income tax purposes) created or organized in or under the laws of the United States, any state thereof or the District of Columbia, an estate the income of which is subject to U.S. tax
regardless of its source, or a trust, if a United States court can exercise primary supervision over the administration of the trust and one or more United States persons can control all substantial
trust decisions, or if the trust was in existence on August 20, 1996 and has properly elected to continue to be treated as a United States person. If a partnership (including any entity treated
as a partnership for United States federal income tax purposes) is a beneficial owner of
ADSs or ordinary shares, the United States federal income tax treatment of a partner in the partnership will generally depend on the status of the partner and the activities of the partnership. Since
your United States federal income and withholding tax treatment may vary depending upon your particular situation, you may be subject to special rules not discussed below. Special rules will apply,
for example, if you are:



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In
addition, this summary is generally limited to persons holding ordinary shares or ADSs as "capital assets" within the meaning of Section 1221 of the United States Internal
Revenue Code and whose functional currency is the U.S. dollar. The discussion below also does not address the effect of any United States state or local tax law or foreign tax law.

For
purposes of applying United States federal income and withholding tax law, a holder of an ADS should be treated as the owner of the underlying shares of ordinary shares represented
by that ADS.

The
United States Treasury has expressed concerns that parties to whom ADSs are pre-released may be taking actions that are inconsistent with the claiming, by United States
persons holding ADSs, of foreign tax credits for United States federal income tax purposes. Such actions would also be inconsistent with the claiming of the reduced rate of tax applicable to dividends
received by certain non-corporate United States persons, as described below. Accordingly, the analysis of the creditability of Russian taxes described below, and the availability of the
reduced tax rate for dividends received by certain non-corporate United States persons, could be affected by future actions that may be taken by the United States Treasury.



For United States federal income tax purposes, the gross amount of a distribution, including the amount of any Russian withholding taxes, with respect to ordinary
shares or ADSs will be treated as a taxable dividend to the extent of our current and accumulated earnings and profits, computed in accordance with United States federal income tax principles. For
taxable years beginning before January 1, 2011, if you are a non-corporate taxpayer such dividends may be taxed at the lower applicable capital gains rate provided
(1) certain holding period requirements are satisfied, (2) either (a) our ADSs continue to be listed on the New York Stock Exchange (or other national securities exchange that is
registered under section 6 of the Securities Exchange Act of 1934 or the Nasdaq Stock Market) or (b) we are eligible for the benefits of the United States-Russia income tax treaty, and
(3) we are not, for the taxable year in which the dividend was paid, or in the preceding taxable year, a "passive foreign investment company." Non-corporate U.S. holders are
strongly urged to consult their own tax advisors as to the applicability of the lower capital gains rate to dividends received with respect to ADSs or shares of ordinary shares. Distributions in
excess of our current and accumulated earnings and profits will be applied against and will reduce your tax basis in ordinary shares or ADSs and, to the extent in excess of such tax basis, will be
treated as gain from a sale or exchange of such ordinary shares or ADSs. You should be aware that we do not intend to calculate our earnings and profits for United States federal income tax purposes
and, unless we make such calculations, you should assume that any distributions with respect to ordinary shares or ADSs
generally will be treated as a dividend, even if that distribution would otherwise be treated as a return of capital or as capital gain pursuant to the rules described above. If you are a corporation,
you will not be allowed a deduction for dividends received in respect of distributions on ordinary shares or ADSs, which is generally available for dividends paid by U.S. corporations.

If
a dividend distribution is paid in rubles, the amount includible in income will be the U.S. dollar value of the dividend, calculated using the exchange rate in effect on the
date the dividend is includible in income by you, regardless of whether the payment is actually converted into U.S. dollars. Any gain or loss resulting from currency exchange rate fluctuations
during the period from the date the dividend is includible in your income to the date the rubles are converted into U.S. dollars will be treated as

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ordinary
income or loss. You may be required to recognize foreign currency gain or loss on the receipt of a refund of Russian withholding tax pursuant to the United States-Russia income tax treaty to
the extent the United States dollar value of the refund differs from the dollar equivalent of that amount on the date of receipt of the underlying dividend.

Russian
withholding tax at the rate applicable to you under the United States-Russia income tax treaty should be treated as a foreign income tax that, subject to generally applicable
limitations and conditions, is eligible for credit against your U.S. federal income tax liability or, at your election, may be deducted in computing taxable income. If, however, the holder of
an ADS is not treated as the owner of the underlying ordinary shares represented by the ADS for U.S. federal income tax purposes, then Russian withholding tax would not be treated as a foreign
income tax eligible for credit as described in the preceding sentence. If Russian tax is withheld at a rate in excess of the rate applicable to you under the United States-Russia income tax treaty,
you may not be entitled to credits for the excess amount, even though the procedures for claiming refunds and the practical likelihood that refunds will be made available in a timely fashion
are uncertain.

For
United States foreign tax credit purposes, a dividend distribution will be treated as foreign source income and will generally be classified as "passive category income" but could,
in the case of certain U.S. holders, constitute "general category income." The rules relating to the determination of the foreign tax credit, or deduction in lieu of the foreign tax credit, are
complex and you should consult your own tax advisors with respect to those rules.



The sale of ordinary shares or ADSs will generally result in the recognition of gain or loss in an amount equal to the difference between the amount realized on
the sale and your adjusted basis in such ordinary shares or ADSs. That gain or loss will be capital gain or loss if the ordinary shares or
ADSs are capital assets in your hands and will be long-term capital gain or loss if the ordinary shares or ADSs have been held for more than one year. If you are an individual, such
realized long-term capital gain is generally subject to a reduced rate of United States federal income tax. Limitations may apply to your ability to offset capital losses against ordinary
income.

Deposits
and withdrawals of ordinary shares by you in exchange for ADSs will not result in the realization of gain or loss for U.S. federal income tax purposes.

Gain
realized on the sale of ordinary shares or ADSs will generally be treated as U.S. source income and therefore the use of foreign tax credits relating to any Russian taxes
imposed upon such sale may be limited. You are strongly urged to consult your own tax advisors as to the availability of tax credits for any Russian taxes withheld on the sale of ordinary shares
or ADSs.



Dividends and proceeds from the sale or other disposition of ordinary shares or ADSs that are paid in the United States or by a U.S.-related financial
intermediary will be subject to U.S. information reporting rules and U.S. backup withholding tax, unless you are a corporation or other exempt recipient. In addition, you will not be
subject to backup withholding if you provide your taxpayer identification number and certify that no loss of exemption from backup withholding has occurred. Holders that are not U.S. persons
generally are not subject to information reporting or backup withholding, but such holders may be required to provide certification as to their non-U.S. status.

F.    Dividends and Paying Agents

Not applicable.

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G.    Statement by Experts

Not applicable.

H.    Documents on Display

We are subject to the informational requirements of the U.S. Exchange Act, and in accordance therewith file periodic reports and other information with
the SEC.

These
materials, including this annual report and the exhibits hereto filed by us, may be examined without charge at the SEC's Public Reference Room at 100 F Street, NE,
Washington, D.C. 20549. You can obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. These filings are also
available at the website maintained by the SEC at http://www.sec.gov.

Information
regarding us is also available on our website at http://www.rt.ru/en. Information included in our website does not form part of this annual report.

I.    Subsidiary Information

Not applicable.

Item 11.Qualitative and Quantitative Disclosures About Market Risk

Our significant market risk exposures are interest rate risk and exchange rate risk. Interest rate risk mainly relates to floating rate debt denominated primarily
in U.S. dollars and euros. As of December 31, 2006, approximately 87% of our interest bearing loans carried floating interest rates, as
compared to approximately 82% as of December 31, 2005. Exchange rate risk relates to our foreign currency indebtedness and, to a lesser extent, our foreign currency denominated cash,
receivables and payables and foreign currency denominated revenues and costs. As of December 31, approximately 2006 94% of our total borrowings were denominated in foreign currencies compared
to 100% in 2005.

We
do not use financial instruments, such as foreign exchange forward contracts, foreign currency options or forward rate agreements, to hedge against these market risks.

Our
consolidated financial statements are presented in Russian rubles. For the year ended December 31, 2006, approximately 8.4%, as compared to approximately 11.5% for the year
ended December 31, 2005, of our revenues were denominated in currencies other than the Russian ruble, principally in U.S. dollars and Special Drawing Rights ("SDR"), which is valued on the
basis of a basket of key international currencies and serves as a settlement unit between us and a number of foreign telecommunications operators. For the year ended December 31, 2006,
approximately 14% of our costs (excluding depreciation, impairment and bad debt expense) are denominated in currencies other than the Russian ruble, principally SDR and U.S. dollar, as compared to
approximately 25% for the year ended December 31, 2005. We receive foreign currency revenues from incoming ILD calls and incur foreign currency expenses for outgoing ILD calls. In 2006, we were
a net payer of foreign currency because the volume of outgoing ILD traffic exceeded the volume of incoming ILD traffic and we paid more foreign currency to foreign operators than we received. The net
balance denominated in foreign currencies (principally in SDR and U.S. dollars) payable by us to foreign operators was RUR 958 million as of December 31, 2006, as compared to
RUR 1,136 million as of December 31, 2005. To the extent that we are not naturally hedged against changes in exchange rates, we are exposed to foreign exchange gains and losses.
We are not engaged in any active hedging of the foreign exchange risk arising out of our operating activities.

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Interest Rate Sensitivity

As of December 31, 2006, we had outstanding borrowings of RUR 3,478 million, of which approximately RUR 3,013 million bore
interest at floating rates, as compared to outstanding borrowings as of December 31, 2005 of RUR 4,083 million, of which approximately RUR 3,349 million bore
interest at floating rates. The interest rate on our floating rate debt is determined principally by reference to London Inter Bank Offered Rate (LIBOR) and European Inter Bank Offered
Rate (EURIBOR).

In
connection with the $100 million loan from Vnesheconombank and CSFB, we entered into interest rate swap agreement with CSFB on June 28, 2006. In accordance with this
agreement, each June 28 and December 28, commencing on December 28, 2006 and ending on December 28, 2012, we undertake an
obligation to CSFB in the amount of 8.55% of the outstanding Vnesheconombank loan balance and CSFB undertakes an obligation to us in the amount of LIBOR plus 3.25% of the outstanding Vnesheconombank
loan balance. We did not designate the above interest rate swap derivative as a hedging instrument. Therefore, this financial instrument was classified as financial liability at the fair value of
RUR 15 million. The net loss of RUR 15 million relating to the change in the fair value of the interest rate swap contract was included in non-operating income
in our consolidated income statement for the year ended December 31, 2006. See "Item 5. Operating and Financial Review and ProspectsB. Liquidity and Capital Resources" and
Note 18 to our consolidated financial statements for additional information.

For
the year ended December 31, 2006, the additional net future financing expense that would have resulted from a hypothetical, instantaneous and unfavorable change of 1000 basis
points in the interest rate applicable to these loans is approximately RUR 71 million, as compared to approximately RUR 96 million for the year ended December 31,
2005. The above sensitivity analysis is based on the assumption of an unfavorable 1000 basis point movement of the interest rates applicable to each homogeneous category of financial assets and
liabilities. A homogeneous category is defined according to the currency in which financial assets and liabilities are denominated and assumes the same interest rate movement within
each category.

Exchange Rate Sensitivity

We have exchange rate exposure primarily with respect to indebtedness denominated in currencies other than the ruble. As of December 31, 2006,
RUR 3,283 million of our interest bearing loans, as compared to RUR 4,083 million as of December 31, 2005, are denominated in foreign currencies, including
RUR 32 million in Japanese Yen, RUR 3,128 million in U.S. dollars and RUR 123 million in euros. The additional future interest expense that would result from
a hypothetical 10% change in foreign currency exchange rates would be approximately RUR 73 million. For the year ended December 31, 2006, such a change would also have resulted in
an estimated foreign exchange loss of approximately RUR 453 million as compared to RUR 576 million for the year ended December 31, 2005. This sensitivity analysis
assumes an unfavorable 10% fluctuation in the exchange rates affecting the foreign currencies in which the indebtedness is denominated. Between January 1, 2007 and December 1, 2007, the
Russian ruble has increased in value by approximately 0.3% as compared to the Japanese Yen, increased by approximately 7.8% as compared to the U.S. dollar and decreased approximately 3.6% as compared
to the euro.

Item 12.Description of Securities Other Than Equity Securities



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Item 13.Defaults, Dividend Arrearages and Delinquencies

A.    Defaults

Due to the insufficiency of cash flow generated by GlobalTel from its operating activities to cover both its operating expenses and refinancing its debt
obligations in full, GlobalTel defaulted on its loan payments to Loral and GlobalStar L.P. as of December 31, 2006 in the amount of RUR 229 million. The loan from Loral did
not provide for any collateral. A penalty in the amount of RUR 47 million is included in the outstanding balance. As of the date of this annual report, GlobalTel has not obtained waivers
from Loral on the loan. In 2006, Loral brought an action against GlobalTel claiming immediate repayment of RUR 222 million. In March 2007, the LCIA ruled in favor of Loral. However, in
October 2007, the Arbitrazh Court of the city of Moscow dismissed Loral's claim to enforce the decision of the LCIA.

GlobalTel
is also in default in respect of payments of its vendor financing payable for 2004, 2005 and 2006 totaling RUR 1,082 million payable to GlobalStar L.P. for
the purchase of three gateways and associated equipment. The vendor financing agreement provides for a pledge of all equipment received from GlobalStar L.P. under the agreement until all
payments are made. The following table sets forth the amounts payable under the vendor financing and the periods payable:

|Period          |  | Millions of rubles
|--------------- |  | ------------------
|Payable in 2004 |  | 423               
|Payable in 2005 |  | 184               
|Payable in 2006 |  | 184               
|Payable in 2007 |  | 184               
|Payable in 2008 |  | 107               
|                |  |                   
|Total           |  | 1,082             
|                |  |                   

GlobalTel is in default with respect to payments due in 2004, 2005 and 2006 and has not obtained a waiver from Globalstar L.P. As a result,
we classified the total balance of RUR 1,082 million as current in our consolidated balance sheet as of December 31, 2006. Penalty interest in the amount of
RUR 167 million accrued for each day of delay at the rate of 10% per annum, and is included in the vendor financing payable.

We
believe that if immediate repayment of the defaulted vendor financing and loans is demanded, it would not have a material adverse effect on our business, financial condition and
results of operations.

Except
as set forth above, as of the date of this annual report, we are not in default on any payment of principal or interest, a sinking or purchase fund installment.

B.    Dividend Arrearages and Delinquencies

None.

Item 14.Material Modifications to the Rights of Security Holders and Use of Proceeds

None.

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Item 15.    Controls and Procedures

DISCLOSURE CONTROLS AND PROCEDURES

As required by Rules 13a-15 and 15d-15 under the Securities Exchange Act of 1934, management has evaluated, with the
participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures as of December 31, 2006. Disclosure controls and procedures
refer to controls and other procedures designed to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized and
reported, within the time periods specified in the rules and forms of the SEC. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that
information required to be disclosed by us in our reports that we file or submit under the Exchange Act is accumulated and communicated to management, including our Chief Executive Officer and Chief
Financial Officer, as appropriate to allow timely decisions regarding our required disclosure. In designing and evaluating our disclosure controls and procedures, management recognizes that any
controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management was required to apply its judgment
in evaluating and implementing possible controls and procedures.

As
described below, thirteen material weaknesses were identified in our internal control over financial reporting. The Public Company Accounting Oversight Board's Auditing Standard
No. 5 defines a material weakness as a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material
misstatement of the company's annual or interim financial statements will not be prevented or detected on a timely basis. As a result of the material weaknesses identified, our Chief Executive Officer
and Chief Financial Officer have
concluded that, as of December 31, 2006, the end of the period covered by this report, our disclosure controls and procedures were not effective at a reasonable assurance level.

MANAGEMENT'S ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

Management is responsible for establishing and maintaining adequate internal control over financial reporting.

Internal
control over financial reporting refers to a process designed by, or under the supervision of, our Chief Executive Officer and Chief Financial Officer and effected by our board
of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles and includes those policies and procedures that:



Internal
control over financial reporting cannot provide absolute assurance of achieving financial reporting objectives because of its inherent limitations. Internal control over
financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures. Internal control over financial
reporting also can be

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circumvented
by collusion or improper override. Because of such limitations, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control over
financial reporting. However, these inherent limitations are known features of the financial reporting process, and it is possible to design into the process safeguards to reduce, though not
eliminate, this risk.

Our
management evaluated the effectiveness of our internal control over financial reporting as of December 31, 2006 using the framework set forth in the report of the Treadway
Commission's Committee of Sponsoring Organizations (COSO), "Internal ControlIntegrated Framework."

As
a result of management's evaluation of our internal control over financial reporting, management identified thirteen material weaknesses in our internal control. These material
weaknesses are described below:



We did not have sufficient procedures and controls to identify and assess risks directly related to our IFRS and U.S. GAAP financial reporting objectives,
including accurate and timely preparation of the consolidated financial statements and related disclosures. In addition, we did not have a strategic development plan and a policy for the
identification, evaluation and minimization of the effects of strategic risks. In the absence of such a plan, certain material investment decisions could be made which may be contradictory to each
other, and thus could materially affect disclosures and amounts reported in our financial statements, including the allocation of purchase price to the businesses or assets we acquire and the accuracy
of reported asset values. The lack of effective controls contributed to the eighth and ninth material weaknesses set out below. This material weakness resulted in adjustments to several of our
significant accounts, including investments, property, plant and equipment, intangible assets and deferred income taxes.



Our Audit Committee did not effectively execute certain policies and procedures governing its activities (including its risk management and internal control
-related responsibilities) set out in the Audit Committee charter and other internal governing documents. The Audit Committee charter and related documents are designed to guide the Audit Committee in
fulfilling its responsibility to provide adequate oversight over our internal control over financial reporting. This material weakness contributed to other material weaknesses described below.



We did not have sufficient and skilled accounting and finance personnel necessary to appropriately develop, update and consistently and appropriately apply our
accounting policies for external reporting under IFRS and U.S. GAAP. This material weakness resulted in adjustments to several of our significant accounts and disclosures and contributed to
other material weaknesses described below. The significant accounts most affected included certain revenue streams earned under the agency agreements, certain operating and non-operating
expenses, property, plant and equipment, pension liabilities, intangible assets and deferred income taxes.



We did not have an effective process for documenting and applying our key accounting policies and procedures. Specifically, we did not put controls in place to
ensure proper accounting and/or reporting for the reassessment of useful lives of our fixed assets, classifications of loans in accordance with their financial covenants, financial instruments at
their fair values and completeness and accuracy

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of
our pension liability. Furthermore, we did not consistently apply accounting policies involving the recognition of agent commissions in our regional branches and failed to provide complete
disclosure with respect to our related party transactions. As a result of these ineffective controls, numerous material audit adjustments to our consolidated financial statements were identified and
recorded. The significant accounts most affected included property, plant and equipment, loans, accounts payable and accrued expenses, related party transactions and certain operating and
non-operating expenses.



We did not have in place processes and controls to identify, capture and communicate relevant and financially significant information to the appropriate
accounting personnel on a timely basis. This resulted in an ineffective system of internal controls over our IFRS financial statements close process, including the reconciliation of our IFRS figures
with U.S. GAAP. This material weakness resulted in material audit adjustments to several of our significant accounts, including advances for capital construction, debt and revenues under agency
agreements.



We did not have in place a comprehensive accounting and reporting system for IFRS and U.S. GAAP reporting purposes. Furthermore, we did not have effective
controls over the completeness, accuracy, validity and restricted access over complex spreadsheets used by us for the transformation of statutory accounts into IFRS and U.S. GAAP. In addition,
the conversion of statutory accounts into IFRS was carried out using summarized data rather than being done simultaneously by recording individual transactions and entries into IFRS and
U.S. GAAP accounting systems. This material weakness resulted in material audit adjustments to several of our significant accounts, including other accounts payable and accrued liabilities,
pension liabilities and related party transactions.



We did not maintain effective IT general controls. Specifically, we did not design and put in place effective logical access and change management controls
related to our billing, payroll and accounting systems. As a result, we did not have controls in place for the proper: (i) administration, distribution, replacement and storage of passwords;
(ii) periodic check of logical access privileges with the job descriptions of the respective users; (iii) monitoring of inactive user accounts; and (iv) review of actions
performed by system administrators. Furthermore, our ineffective change management controls did not allow us to make appropriate initiation, approval, testing and implementation of changes to the
relevant IT systems. Moreover, we did not maintain effective controls to ensure data security, including the failure to implement a disaster recovery plan and fully test our back-up
system. This material weakness created a reasonable possibility that the application controls, which rely upon these IT general controls, are ineffective resulting in a reasonable possibility of a
material misstatement of several of our significant accounts, including revenues and payroll expenses.



We did not have sufficient processes and effective controls over the potential impairment of our long-lived and intangible assets, including goodwill.
In particular, in the absence of strategic plans for our operations and cash flows, we did not have the ability to accurately prepare related fair market value calculations necessary to determine a
potential impairment write-down with respect to such assets. As a result of this deficiency, long-lived assets may not be identified on a timely basis for impairment testing
and our analysis may be based on incorrect data or improper assumptions. This material weakness did not result in material adjustments to our consolidated financial statements;

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however,
there is a reasonable possibility that due to this control deficiency a material misstatement of our consolidated financial statements will not be prevented or detected on a
timely basis.



We did not maintain effective controls over the accounting for our subsidiaries, associates and other investments and the related disclosures in accordance with
IFRS and U.S. GAAP. Specifically, we did not design and put in place effective controls to ensure proper purchase price allocation and the consolidation of newly-acquired subsidiaries.
Moreover, we did not maintain effective controls over the preparation of IFRS financial statements by our consolidated subsidiaries and associates. We also did not have sufficient controls in place to
monitor the appropriate classification of our investments as short or long-term assets and to ensure the complete recognition of interest income at the end of each period. This material
weakness resulted in material adjustments to several of our significant accounts, including consolidated investments, equity method investments including related gains and losses, as well as short and
long-term investments.



We did not maintain effective controls over the completeness and accuracy of our accounting for settlements with contractors. Specifically, we did not design and
put in place effective controls to ensure proper reconciliation of balances (e.g.,accounts payables) with contractors and to undertake
sufficient follow-up procedures on reconciling items to ensure certain financial data in
our consolidated financial statements is accurate. Moreover, we did not maintain effective controls to ensure proper off-setting of advances paid with related payables in accordance with
certain agreement terms and did not ensure appropriate accounting for cut-off issues. This material weakness resulted in material adjustments to several of our significant accounts,
including other accounts payable and accrued liabilities, advances for capital construction and operating expenses.



We did not maintain effective processes and controls over the accounting for certain of our revenues and expenses from the provision of long distance
telecommunications services under agency agreements. We relied on our agents' billing systems without sufficient internal controls to record and report revenues and expenses from our subscribers
associated with these agents. We do not have an adequate retail billing system and did not have sufficient personnel and procedures to process data, prepare source documents, maintain information
systems, issue bills and collect payments from such subscribers. This material weakness resulted in material adjustments to several of our significant accounts, including operating expenses, bad debt
provision and related expense and current and deferred income taxes.



We did not design and maintain effective controls over the accounting for certain revenues related to other revenue and their respective accounts receivables.
Specifically, our controls were not designed and operating effectively to ensure the completeness and accuracy of revenues generated from the rent of channel, television and radio transmissions,
free-phone and telegraph services and equipment maintenance. This material weakness did not result in material adjustments to our consolidated financial statements; however, there is a
reasonable possibility that due to this control deficiency a material misstatement of our consolidated financial statements related to the revenue and respective accounts receivables line items will
not be prevented or detected on a timely basis.

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We did not have sufficient processes and effective controls over the completeness and accuracy of our deferred income tax balances and disclosure in accordance
with IFRS and U.S. GAAP. Specifically, we did not maintain adequate controls over the review of our subsidiaries' tax registers and filings, as well as over the calculation of deferred taxes,
which includes the classification of the difference between the tax basis and the IFRS and U.S. GAAP accounting basis as temporary and non- temporary. In addition, we did not
establish, design and test controls related to the valuation of our deferred tax assets. This material weakness did not result in material adjustments to our consolidated financial statements;
however, there is a reasonable possibility that due to this control deficiency a material misstatement of our consolidated financial statements will not be prevented or detected on a
timely basis.

As
a result of the material weaknesses described above, management has concluded that our internal control over financial reporting was ineffective as of December 31, 2006 based
on the "Internal ControlIntegrated Framework" set forth in COSO.

Management's
assessment of the effectiveness of our internal controls over financial reporting as of December 31, 2006 has been audited by Ernst & Young LLC, an
independent registered public accounting firm. Their attestation report on internal control over financial reporting is set forth below.

REMEDIATION ACTIVITIES AND CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

Remediation Activities

Management believes the measures that have been implemented to remediate the material weaknesses have had a material impact on our internal control over financial
reporting since December 31, 2006, and anticipates that these measures and other ongoing enhancements will continue to have a material impact on our internal control over financial reporting in
future periods. We expect our remediation efforts for each material weakness identified above to continue in fiscal years 2007 and 2008. To remediate these material weaknesses, we have adopted or will
adopt the following changes:



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Changes in Internal Control over Financial Reporting

Management has evaluated, with the participation of our Chief Executive Officer and Chief Financial Officer, whether any changes in our internal control over
financial reporting that occurred during the period covered by this annual report have materially affected, or are reasonably likely to materially affect, our internal control over financial
reporting. There have not been any changes in internal control over financial reporting that occurred during our last fiscal year that have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.

ATTESTATION REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The
Board of Directors and Shareholders of OAO Rostelecom

We
have audited management's assessment, included in Management's Annual Report on Internal Control Over Financial Reporting, that OAO Rostelecom, an open joint stock company, and
subsidiaries (hereinafter referred to as the "Group") has not maintained effective internal control over financial reporting as of December 31, 2006, based on criteria established in Internal
ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). The Group's management is responsible for maintaining
effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on
management's assessment and an opinion on the effectiveness of the Group's internal control over financial reporting based on our audit.

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We
conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control
over financial reporting, evaluating management's assessment, assessing the risk that a material weakness
exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our opinion.

A
company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures
that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

Because
of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In
our previously issued report dated July 19, 2007, we disclaimed opinions on both management's incomplete assessment of the Group's internal control over financial reporting as
of December 31, 2006 and the effectiveness of the Group's internal control over financial reporting as of that date. The Group's management has subsequently completed its assessment of the
Group's internal control over financial reporting and we have completed our audit of the effectiveness of the Group's internal control over financial reporting as of December 31, 2006.

A
material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material
misstatement of the company's annual financial statements will not be prevented or detected on a timely basis. The following thirteen material weaknesses have been identified and included in
management's assessment:

Lack of Risk Assessment Processes and Strategic Plans and Policies

The Group did not have sufficient procedures and controls to identify and assess risks directly related to the Group's financial reporting objectives under
International Financial Reporting Standards ("IFRS") and accounting principles generally accepted in the United States of America ("U.S. GAAP"), including accurate and timely preparation of the
consolidated financial statements and related disclosures. In addition, the Group did not have a strategic development plan and a policy for the identification, evaluation and minimization of the
effects of strategic risks. In the absence of such a plan, certain material investment decisions could be made which may be contradictory to each other, and thus could materially affect disclosures
and amounts reported in the Group's financial statements, including the allocation of purchase price to the businesses or assets the Group acquires and the accuracy of reported asset values. The lack
of effective controls contributed to the material weaknesses described below related to Impairment Reviews of Long-lived and Intangible Assets and Accounting for Subsidiaries, Associates
and Other Investments. This material weakness resulted in adjustments to

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several
of the Group's significant accounts, including investments, property, plant and equipment, intangible assets and deferred income taxes.

Audit Committee Oversight over the Group's Financial Reporting Process

The Group's Audit Committee did not effectively execute certain policies and procedures governing its activities (including its risk management and internal
control-related responsibilities) set out in the Audit Committee Charter and other internal governing documents. The Audit Committee Charter and related documents are designed to guide the Audit
Committee in fulfilling its responsibility to provide adequate oversight over the Group's internal control over financial reporting. This material weakness contributed to other material weaknesses
described below.

Accounting and Finance Personnel

The Group did not have sufficient and skilled accounting and finance personnel necessary to appropriately develop, update and consistently and appropriately apply
the Group's accounting policies for external reporting under IFRS and U.S. GAAP. This material weakness resulted in adjustments to several of the Group's significant accounts and disclosures
and contributed to other material weaknesses described below. The significant accounts most affected included certain revenue streams earned under the agency agreements, certain operating and
non-operating expenses, property, plant and equipment, pension liabilities, intangible assets and deferred income taxes.

Group Accounting Policies and Procedures

The Group did not have an effective process for documenting and applying its key accounting policies and procedures. Specifically, the Group did not put controls
in place to ensure proper accounting and/or reporting for the reassessment of useful lives of the Group's fixed assets, classifications of loans in accordance with their financial covenants, financial
instruments at their fair values and completeness and accuracy of the Group's pension liability. Furthermore, the Group did not consistently apply accounting policies involving the recognition of
agent commissions in its regional branches and failed to provide complete disclosure with respect to the Group's related party transactions. As a result of these ineffective controls, numerous
material audit adjustments to the Group's consolidated financial statements were identified and recorded. The significant accounts most affected included property, plant and equipment, loans, accounts
payable and accrued expenses, related party transactions and certain operating and non-operating expenses.

Information and Communication

The Group did not have in place processes and controls to identify, capture and communicate relevant and financially significant information to the appropriate
accounting personnel on a timely basis. This resulted in an ineffective system of internal controls over the Group's IFRS financial statements close process, including the reconciliation of IFRS
figures with U.S. GAAP. This material weakness resulted in material audit adjustments to several of the Group's significant accounts, including advances for capital construction, debt and
revenues under agency agreements.

IFRS and U.S. GAAP Transformation Process

The Group did not have in place a comprehensive accounting and reporting system for IFRS and U.S. GAAP reporting purposes. Furthermore, the Group did not
have effective controls over the completeness, accuracy, validity and restricted access over complex spreadsheets used by the Group for the transformation of statutory accounts into IFRS and
U.S. GAAP. In addition, the conversion of statutory accounts into IFRS was carried out using summarized data rather than being done simultaneously by recording individual transactions and
entries into IFRS and U.S. GAAP accounting

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systems.
This material weakness resulted in material audit adjustments to several of the Group's significant accounts, including other accounts payable and accrued liabilities, pension liabilities and
related party transactions.

IT General Controls

The Group did not maintain effective IT general controls. Specifically, the Group did not design and put in place effective logical access and change management
controls related to the Group's billing, payroll and accounting systems. As a result, the Group did not have controls in place for the proper: (i) administration, distribution, replacement and
storage of passwords; (ii) periodic check of logical access privileges with the job descriptions of the respective users; (iii) monitoring of inactive user accounts; and
(iv) review of actions performed by system administrators. Furthermore, the Group's ineffective change management controls did not allow the Group to make appropriate initiation, approval,
testing and implementation of changes to the relevant IT systems. Moreover, the Group did not maintain effective controls to ensure data security, including the failure to implement a disaster
recovery plan and fully test the Group's back-up system. This material weakness created a reasonable possibility that the application controls, which rely upon these IT general controls,
are ineffective resulting in a reasonable possibility of a material misstatement of several of the Group's significant accounts, including revenues and payroll expenses.

Impairment Reviews of Long-lived and Intangible Assets

The Group did not have sufficient processes and effective controls over the potential impairment of its long-lived and intangible assets, including
goodwill. In particular, in the absence of strategic plans for the Group's operations and cash flows, the Group did not have the ability to accurately prepare related fair market value calculations
necessary to determine a potential impairment write-down with respect to such assets. As a result of this deficiency, long-lived assets may not be identified on a timely basis
for impairment testing and the Group's analysis may be based on incorrect data or improper assumptions. This material weakness did not result in material adjustments to the Group's consolidated
financial statements; however, there is a reasonable possibility that due to this control deficiency a material misstatement of the Group's consolidated financial statements will not be prevented or
detected on a timely basis.

Accounting for Subsidiaries, Associates and Other Investments

The Group did not maintain effective controls over the accounting for its subsidiaries, associates and other investments and the related disclosures in accordance
with IFRS and U.S. GAAP. Specifically, the Group did not design and put in place effective controls to ensure proper purchase price allocation and the consolidation of newly-acquired
subsidiaries. Moreover, the Group did not maintain effective controls over the preparation of IFRS financial statements by the Group's consolidated subsidiaries and associates. The Group also did not
have sufficient controls in place to monitor the appropriate classification of its investments as short or long-term assets and to ensure the complete recognition of interest income at the
end of each period. This material weakness resulted in material
adjustments to several of the Group's significant accounts, including consolidated investments, equity method investments including related gains and losses, as well as short and long-term
investments.

Settlement with Contractors

The Group did not maintain effective controls over the completeness and accuracy of its accounting for settlements with contractors. Specifically, the Group did
not design and put in place effective controls to ensure proper reconciliation of balances (e.g.,accounts payables) with contractors and to
undertake sufficient follow-up procedures on reconciling items to ensure certain financial data

162

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in
the Group's consolidated financial statements is accurate. Moreover, the Group did not maintain effective controls to ensure proper off-setting of advances paid with related payables in
accordance with certain agreement terms and did not ensure appropriate accounting for cut-off issues. This material weakness resulted in material adjustments to several of the Group's
significant accounts, including other accounts payable and accrued liabilities, advances for capital construction and operating expenses.

Revenue and Expenses Recognition under Agency Agreements

The Group did not maintain effective processes and controls over the accounting for certain of its revenues and expenses from the provision of long distance
telecommunications services under agency agreements. The Group relied on its agents' billing systems without sufficient internal controls to record and report revenues and expenses from the Group's
subscribers associated with these agents. The Group does not have an adequate retail billing system and did not have sufficient personnel and procedures to process data, prepare source documents,
maintain information systems, issue bills and collect payments from such subscribers. This material weakness resulted in material adjustments to several of the Group's significant accounts, including
operating expenses, bad debt provision and related expense and current and deferred income taxes.

Revenue Recognition related to Other Revenues

The Group did not design and maintain effective controls over the accounting for certain revenues related to other revenue and their respective accounts
receivables. Specifically, the Group's controls were not designed and operating effectively to ensure the completeness and accuracy of revenues
generated from the rent of channel, television and radio transmissions, free-phone and telegraph services and equipment maintenance. This material weakness did not result in material
adjustments to the Group's consolidated financial statements; however, there is a reasonable possibility that due to this control deficiency a material misstatement of the Group's consolidated
financial statements related to the revenue and respective accounts receivables line items will not be prevented or detected on a timely basis.

Deferred Income Taxes

The Group did not have sufficient processes and effective controls over the completeness and accuracy of its deferred income tax balances and disclosure in
accordance with IFRS and U.S. GAAP. Specifically, the Group did not maintain adequate controls over the review of its subsidiaries' tax registers and filings, as well as over the calculation of
deferred taxes, which includes the classification of the difference between the tax basis and the IFRS and U.S. GAAP accounting basis as temporary and non- temporary. In addition,
the Group did not establish, design and test controls related to the valuation of its deferred tax assets. This material weakness did not result in material adjustments to the Group's consolidated
financial statements; however, there is a reasonable possibility that due to this control deficiency a material misstatement of the Group's consolidated financial statements will not be prevented or
detected on a timely basis.

These
material weaknesses were considered in determining the nature, timing, and extent of audit tests applied in our audit of the Group's December 31, 2006 consolidated financial
statements, and this report does not affect our report dated December 14, 2007 on those consolidated financial statements.

In
our opinion, management's assessment that the Group did not maintain effective internal control over financial reporting as of December 31, 2006, is fairly stated, in all
material respects, based on the COSO criteria. Also, in our opinion, because of the effects of the material weaknesses described above on the achievement of the objectives of the control criteria, the
Group has not maintained effective internal control over financial reporting as of December 31, 2006, based on the COSO criteria.

/s/
ERNST & YOUNG LLC
Moscow, Russia
December 14, 2007

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Item 16A.Audit committee financial expert

The Board of Directors has determined that Yevgeny I. Logovinsky is an "audit committee financial expert" as defined in Item 16A of
Form 20-F. Mr. Logovinsky is an independent board member as defined under the New York Stock Exchange Listing Standards.

Item 16B.Code of Ethics

On April 28, 2004, the Board of Directors adopted our Code of Ethics. A copy of the Code of Ethics is available on our website,
http://www.rt.ru/en/centr-invest/corporate/corp-doc/.

The
Code of Ethics was prepared with the aim of satisfying the requirements and recommendations of the New York Stock Exchange and the SEC. It sets forth standards for the business
conduct and ethical behavior of members of our Board of Directors, Audit Commission, officers and employees including:



As
of the date of this annual report, no waivers, including implicit waivers, from the provisions of the Code of Ethics had been granted.

Item 16C.Principal Accountant Fees and Services

Audit fees

For professional services rendered for the audits of our financial statements and our consolidated subsidiaries for the fiscal years ended December 31,
2006 and 2005, Ernst & Young LLC, or Ernst & Young, billed a total of $2,300,000 and $1,312,000, respectively. These amounts are net of VAT and include fees billed for audits of
our and certain of our consolidated subsidiaries' financial statements prepared under both International Financial Reporting Standards and Russian statutory accounting regulations and the reading of
the information included in our annual reports.

Audit-related fees

For professional audit-related services rendered, Ernst & Young billed us and our consolidated subsidiaries a total of $231,000 and $540,300, net of VAT,
in 2006 and 2005, respectively. Audit-related services included the review of interim financial statements.

Tax fees

None.

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All other fees

None.

Pre-approval policies and procedures

All of the audit and audit-related services described above were pre-approved by the Audit Committee. The Audit Committee considered whether the
non-audit services rendered by Ernst & Young were compatible with maintaining its independence as auditors of our financial statements and determined that they were.

No
hours expended by Ernst & Young to audit our financial statements for 2006 were attributed to work performed by persons other than the principal accountant's
full-time, permanent employees.

In
accordance with its Regulations, the Audit Committee is directly responsible for the recommendation, compensation, retention and oversight of our independent auditors. The Audit
Committee recommends the independent auditors to the Board of Directors, and the Board of Directors nominates the independent auditors for approval by the general shareholders' meeting in accordance
with the requirements of Russian legislation.

Item 16D.Exemptions from the Listing Standards for Audit Committees

In accordance with Rule 10A-3(d) of the U.S. Exchange Act, we are required to disclose all exemptions from independence standards relating to
the Audit Committee.

As
of the date of this annual report, we relied on one exemption from the independence requirements of U.S. Exchange Act Rule 10A-3 (b)(1)(ii)(B) which allows foreign
private issuers to have a non-management affiliated person with only observer status serve on the Audit Committee. Elena P. Selvich serves as a member of the Audit Committee and meets the
exemption requirements set forth in U.S. Exchange Act Rule 10A-3(b)(1)(iv)(d) as she:



As
of the date of this annual report, we did not rely on any exemptions other than as described above.

Item 16E.Purchases of Equity Securities by the Issuer and Affiliated Purchasers

There were no purchases by or on our behalf or any "affiliated purchaser" of shares or other units of any class of our equity securities during the period covered
by this annual report.

Item 17.Financial Statements

Not applicable.

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Item 18.Financial Statements

See pages F-1 to F-72 of our consolidated financial statements which are filed as part of this annual report.

Item 19.Exhibits

|Exhibit No |  | Description                                                                                                                                                                                                                                
|---------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|1.1        |  | Charter (Articles of Association) of Open Joint Stock Company Long-Distance and International Communications Rostelecom (restated version No. 7), approved by the General Shareholders' Meeting on June 16,
2007+                          
|1.2        |  | Regulations on the General Shareholders' Meeting of the Open Joint Stock Company Long-Distance and International Telecommunications Rostelecom (restated version No. 2), approved by the General Shareholders' Meeting on June 15,
2003(2)+
|1.3        |  | Regulations on the Board of Directors of the Open Joint Stock Company Long-Distance and International Telecommunications Rostelecom (restated version No. 5), approved by the General Shareholders' Meeting on June 16,
2007+              
|1.4        |  | Regulations on the Management Board of the Open Joint Stock Company Long-Distance and International Telecommunications Rostelecom (restated version No. 3), approved by the General Shareholders' Meeting on June 16,
2007+                
|1.5        |  | Regulations on the General Director of the Open Joint Stock Company Long-Distance and International Telecommunications Rostelecom (restated version No. 1), approved by the General Shareholders' Meeting on June 30, 2001(1)+             
|1.6        |  | Regulations On the Audit Commission of OJSC Rostelecom (restated version No. 1), approved by the General Shareholders' Meeting on June 24, 2006(5)+                                                                                        
|4.1        |  | Consortium Agreement, dated as of September 3, 2001, among Rostelecom and NPF Rostelecom-Garantia, ZAO North-West Telecombank, NP TSIPRT, OOO CB Russian Industrial Bank, ZAO Gamma-Invest, ZAO CFP-Finance and RTC-Leasing(2)+            
|4.1.1      |  | Supplement to the Consortium Agreement, dated May 29, 2003, among Rostelecom and NPF Rostelecom-Garantia, ZAO North-West Telecombank, NP TSIPRT, OOO CB Russian Industrial Bank, ZAO Gamma-Invest, ZAO CFP-Finance and RTC-Leasing(2)+     
|4.2        |  | Stock Sale and Purchase Agreement, dated October 22, 2003, among Rostelecom and CJSC Raiffeisenbank Austria(4)                                                                                                                             
|4.3        |  | Stock Sale and Purchase Agreement, dated October 27, 2003, among Rostelecom and CJSC Raiffeisenbank Austria(4)                                                                                                                             
|4.4        |  | Termination Agreement, dated October 2, 2003, among Rostelecom and RTC-Leasing(4)+                                                                                                                                                         
|4.5        |  | Form of Agreement to Amend Financial Lease Agreement dated October 2, 2004, among Rostelecom and RTC-Leasing(4)+                                                                                                                           
|4.6        |  | Form of Agreement to Amend Financial Lease Agreement, dated December 26, 2003 among Rostelecom and RTC-Leasing(4)                                                                                                                          
|4.7        |  | Form of Agreement to Novate Obligations under the Financial Lease Agreements, dated January 29, 2004, among RTC-Leasing and Rostelecom(4)                                                                                                  
|4.8        |  | Form of Assignment, dated February 12, 2004 among RTC-Leasing and Westelcom(4)                                                                                                                                                             
|           |  |                                                                                                                                                                                                                                            

166

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|4.9    |  | Ownership Interest Purchase Agreement, dated as of March 13, 2002, by and among SFMT-CIS, Inc., LLC Teleross and Rostelecom(3)                                                                                                                                                                                      
|------ |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|4.10   |  | Subscription Agreement, dated as of September 5, 2002 by and among Golden Telecom, Inc. and Rostelecom(3)                                                                                                                                                                                                           
|4.11   |  | Shareholders Agreement, dated as of September 5, 2002 by and among Golden Telecom Inc., Alfa Telecom Limited, Rostelecom, Capital International Global Emerging Markets Private Equity Fund, L. P., Cavendish Nominees Limited and First NIS
Regional Fund SICAV(3)                                                 
|4.11.1 |  | Restated Shareholders Agreement, dated as of August 19, 2003, between and among Golden Telecom, Inc., Alfa Telecom Limited, Nye Telenor East Invest AS, Rostelecom, Capital International Global Emerging Markets Private Equity Fund, L.P.,
 Cavendish Nominees Limited and First NIS Regional Fund SICAV(4)       
|4.12   |  | Standstill Agreement, dated as of September 5, 2002 by and among Golden Telecom Inc., Alfa Telecom Limited, Rostelecom, Capital International Global Emerging Markets Private Equity Fund, L. P., Cavendish Nominees Limited and First NIS
Regional Fund SICAV(3)                                                   
|4.12.1 |  | Restated Standstill Agreement, dated as of August 19, 2003, between and among Alfa Telecom Limited, Nye Telenor East Invest AS, OAO Rostelecom, Capital International Global Emerging Markets Private Equity Fund, L.P., Cavendish Nominees
Limited, First NIS Regional Fund SICAV and Golden Telecom, Inc.(4)      
|4.13   |  | Registration Rights Agreement, dated as of September 5, 2002 by and between Golden Telecom, Inc. and Rostelecom(3)                                                                                                                                                                                                  
|4.13.1 |  | Restated Registration Rights Agreement, dated as of August 19, 2003, between and among Golden Telecom, Inc., Alfa Telecom Limited, Nye Telenor East Invest AS, Rostelecom, Capital International Global Emerging Markets Private Equity Fund,
 L.P., Cavendish Nominees Limited and First NIS Regional Fund SICAV(4)
|4.14   |  | Loan Agreement, dated August 16, 1994, among Rostelecom, the Council of Ministers of the Russian Federation and Vnesheconombank(4)+                                                                                                                                                                                 
|4.15   |  | Agency Agreement, dated June 5, 2003, among Rostelecom and OJSC Alfa-Bank(4)+                                                                                                                                                                                                                                       
|4.15.1 |  | Amendment to Agency agreement, dated June 17, 2003, among Rostelecom and OJSC Alfa-Bank(4)                                                                                                                                                                                                                          
|4.16   |  | Debt Repayment Agreement among Ministry of Finance of the Russian Federation, Vnesheconombank and Rostelecom, dated June 19, 2003(4)+                                                                                                                                                                               
|4.17   |  | Agency Agreement No. 33-06-03, dated June 9, 2006, between Rostelecom and Dalsvyaz+                                                                                                                                                                                                                                 
|4.17.1 |  | Appendix No. 1 (Form 1) to Agency Agreement No. 33-06-03, dated June 9, 2006, between Rostelecom and Dalsvyaz+                                                                                                                                                                                                      
|4.17.2 |  | Appendix No. 1 (Form 2) to Agency Agreement No. 33-06-03, dated June 9, 2006, between Rostelecom and Dalsvyaz+                                                                                                                                                                                                      
|4.17.3 |  | Appendix No. 2 to Agency Agreement No. 33-06-03, dated June 9, 2006, between Rostelecom and Dalsvyaz+                                                                                                                                                                                                               
|4.17.4 |  | Additional Agreement No. 1, dated June 9, 2006, to Agency Agreement No. 33-06-03, dated June 9, 2006, between Rostelecom and Dalsvyaz+                                                                                                                                                                              
|       |  |                                                                                                                                                                                                                                                                                                                     

167

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|4.18   |  | Agreement, dated January 1, 2006, on Amendments to Network Interconnection Contract No. 1-DVF dated August 8, 2003 between Rostelecom and Dalsvyaz(5)+                                    
|------ |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|4.18.1 |  | Additional Agreement No. 1, dated June 9, 2006, to Network Interconnection Contract No. 1-DVF dated August 8, 2003, between Rostelecom and Dalsvyaz+                                      
|4.18.2 |  | Additional Agreement No. 2, dated June 9, 2006, to Network Interconnection Contract No. 1-DVF dated August 8, 2003, between Rostelecom and Dalsvyaz+                                      
|4.18.3 |  | Additional Agreement No. 3, dated June 9, 2006, to Network Interconnection Contract No. 1-DVF dated August 8, 2003, between Rostelecom and Dalsvyaz+                                      
|4.18.4 |  | Additional Agreement No. 4, dated August 10, 2007, to Network Interconnection Contract No. 1-DVF dated August 8, 2003, between Rostelecom and Dalsvyaz+                                   
|4.19   |  | Service Provision Agreement No. 753-05-23, dated January 1, 2006, between Rostelecom and Dalsvyaz(5)+                                                                                     
|4.19.1 |  | Additional Agreement No. 1, dated June 9, 2006, to Service Provision Agreement No. 753-05-23, dated January 1, 2006, between Rostelecom and Dalsvyaz+                                     
|4.19.2 |  | Additional Agreement No. 2, dated August 10, 2006, to Service Provision Agreement No. 753-05-23, dated January 1, 2006, between Rostelecom and Dalsvyaz+                                  
|4.20   |  | Agreement No. 1097-05, dated December 27, 2005, on Amendments to Network Interconnection Contract No. 05-21/0155, dated October 24, 2003, between Rostelecom and VolgaTelecom(5)+         
|4.20.1 |  | Additional Agreement No. 1, dated July 24, 2006, to Agreement No. 1097-05, dated December 27, 2005, on Amendments to Network Interconnection Contract between Rostelecom and VolgaTelecom+
|4.20.2 |  | Additional Agreement No. 2, July 24, 2006, to Agreement No. 1097-05, dated December 27, 2005, on Amendments to Network Interconnection Contract between Rostelecom and VolgaTelecom+      
|4.20.3 |  | Additional Agreement No. 3, July 24, 2006, to Agreement No. 1097-05, dated December 27, 2005, on Amendments to Network Interconnection Contract between Rostelecom and VolgaTelecom+      
|4.20.4 |  | Additional Agreement No. 4, July 24, 2006, to Agreement No. 1097-05, dated December 27, 2005, on Amendments to Network Interconnection Contract between Rostelecom and VolgaTelecom+      
|4.20.5 |  | Additional Agreement No. 5, July 24, 2006, to Agreement No. 1097-05, dated December 27, 2005, on Amendments to Network Interconnection Contract between Rostelecom and VolgaTelecom+      
|4.20.6 |  | Additional Agreement No. 6, July 24, 2006, to Agreement No. 1097-05, dated December 27, 2005, on Amendments to Network Interconnection Contract between Rostelecom and VolgaTelecom+      
|4.20.7 |  | Additional Agreement No. 7, July 24, 2006, to Agreement No. 1097-05, dated December 27, 2005, on Amendments to Network Interconnection Contract between Rostelecom and VolgaTelecom+      
|       |  |                                                                                                                                                                                           

168

---



|4.20.8 |  | Additional Agreement No. 8, dated June 4, 2007, to Agreement No. 1097-05, dated December 27, 2005, on Amendments to Network Interconnection Contract between Rostelecom and VolgaTelecom+
|------ |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|4.21   |  | Agency Agreement No. 36-06-23, dated July 24, 2006, between Rostelecom and VolgaTelecom+                                                                                                 
|4.21.1 |  | Appendix No. 1 (Form 1) to Agency Agreement No. 36-06-23, dated July 24, 2006, between Rostelecom and VolgaTelecom+                                                                      
|4.21.2 |  | Appendix No. 1 (Form 2) to Agency Agreement No. 36-06-23, dated July 24, 2006, between Rostelecom and VolgaTelecom+                                                                      
|4.21.3 |  | Appendix No. 2 to Agency Agreement No. 36-06-23, dated July 24, 2006, between Rostelecom and VolgaTelecom+                                                                               
|4.21.4 |  | Appendix No. 3 to Agency Agreement No. 36-06-23, dated July 24, 2006, between Rostelecom and VolgaTelecom+                                                                               
|4.21.5 |  | Appendix No. 4 to Agency Agreement No. 36-06-23, dated July 24, 2006, between Rostelecom and VolgaTelecom+                                                                               
|4.22   |  | Service Provision Agreement No. 1096-05 (748-05-23), dated December 27, 2005, between Rostelecom and VolgaTelecom(5)+                                                                    
|4.22.1 |  | Additional Agreement No. 1, dated July 4, 2007, to Service Provision Agreement No. 1096-05 (748-05-23), dated December 27, 2005, between Rostelecom and VolgaTelecom+                    
|4.23   |  | Agreement, dated January 1, 2006, on Amendments to Network Interconnection Contract No. 03-01-01, dated August 1, 2003, between Rostelecom and North-West Telecom(5)+                    
|4.23.1 |  | Additional Agreement No. 1, dated November 1, 2006, to Agreement, dated January 1, 2006, on Amendments to Network Interconnection Contract, between Rostelecom and North-West Telecom+   
|4.23.2 |  | Additional Agreement No. 3, dated November 1, 2006, to Agreement, dated January 1, 2006, on Amendments to Network Interconnection Contract, between Rostelecom and North-West Telecom+   
|4.24   |  | Service Provision Agreement No. 03-01-1035 (747-05-23), dated January 1, 2006, between Rostelecom and North-West Telecom(5)+                                                             
|4.24.1 |  | Additional Agreement No. 1, dated August 16, 2007, to Service Provision Agreement No. 03-01-1035 (747-05-23), dated January 1, 2006, between Rostelecom and North-West Telecom+          
|4.25   |  | Agency Agreement No. 34-06-03, dated February 22, 2006, between Rostelecom and Sibirtelecom(5)+                                                                                          
|4.25.1 |  | Appendix No. 1 (Form 1) to Agency Agreement No. 34-06-03, dated February 22, 2006, between Rostelecom and Sibirtelecom(5)+                                                               
|4.25.2 |  | Appendix No. 1 (Form 2) to Agency Agreement No. 34-06-03, dated February 22, 2006, between Rostelecom and Sibirtelecom(5)+                                                               
|4.25.3 |  | Appendix No. 2 to Agency Agreement No. 34-06-03, dated February 22, 2006, between Rostelecom and Sibirtelecom(5)+                                                                        
|       |  |                                                                                                                                                                                          

169

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|4.25.4 |  | Appendix No. 3 to Agency Agreement No. 34-06-03, dated February 22, 2006, between Rostelecom and Sibirtelecom+                                                          
|------ |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|4.25.5 |  | Appendix No. 4 to Agency Agreement No. 34-06-03, dated February 22, 2006, between Rostelecom and Sibirtelecom+                                                          
|4.26   |  | Agreement, dated December 28, 2005, on Amendments to Network Interconnection Contract No. 1-01, dated August 1, 2003, between Rostelecom and Sibirtelecom(5)+           
|4.26.1 |  | Additional Agreement No. 1, dated March 9, 2006, to contract on network connection between Rostelecom and Sibirtelecom No. 1-01, dated August 1, 2003(5)+               
|4.26.2 |  | Additional Agreement No. 2, dated March 9, 2006, to contract on network connection between Rostelecom and Sibirtelecom No. 1-01, dated August 1, 2003(5)+               
|4.26.3 |  | Additional Agreement No. 3, dated March 9, 2006, to contract on network connection between Rostelecom and Sibirtelecom No. 1-01, dated August 1, 2003(5)+               
|4.26.4 |  | Additional Agreement No. 4, dated June 14, 2007, to contract on network connection between Rostelecom and Sibirtelecom No. 1-01, dated August 1, 2003+                  
|4.27   |  | Service Provision Agreement No. 751-05-23, dated December 28, 2005, between Rostelecom and Sibirtelecom(5)+                                                             
|4.27.1 |  | Additional Agreement No. 1, dated January 1, 2006, to Service Provision Agreement No. 751-05-23, dated December 28, 2005, between Rostelecom and Sibirtelecom(5)+       
|4.28   |  | Agency Agreement No. 213/24-206, dated March 1, 2006, between Rostelecom and Uralsvyazinform(5)+                                                                        
|4.28.1 |  | Appendix No. 1 (Form 1) to Agency Agreement No. 213/24-206, dated March 1, 2006, between Rostelecom and Uralsvyazinform(5)+                                             
|4.28.2 |  | Appendix No. 1 (Form 2) to Agency Agreement No. 213/24-206, dated March 1, 2006, between Rostelecom and Uralsvyazinform(5)+                                             
|4.28.3 |  | Appendixes No. 2, 3, 4 to Agency Agreement No. 213/24-206, dated March 1, 2006, between Rostelecom and Uralsvyazinform(5)+                                              
|4.28.4 |  | Agreement, dated June 26, 2007, on Amendments to Agency Agreement No. 213/24-206, dated March 1, 2006, between Rostelecom and Uralsvyazinform+                          
|4.29   |  | Agreement, dated January 1, 2006, on Amendments to Network Interconnection Contract No. UF/D-MRK-01/03, dated August 1, 2003, between Rostelecom and Uralsvyazinform(5)+
|4.29.1 |  | Additional Agreement No. 1a, dated March 11, 2006, to contract on network connection between Rostelecom and Uralsvyazinform, dated January 1, 2006(5)+                  
|4.29.2 |  | Additional Agreement No. 2, dated March 11, 2006, to contract on network connection between Rostelecom and Uralsvyazinform, dated January 1, 2006(5)+                   
|4.29.3 |  | Additional Agreement No. 3, dated March 11, 2006, to contract on network connection between Rostelecom and Uralsvyazinform, dated January 1, 2006(5)+                   
|4.29.4 |  | Additional Agreement No. 4, dated March 11, 2006, to contract on network connection between Rostelecom and Uralsvyazinform, dated January 1, 2006(5)+                   
|       |  |                                                                                                                                                                         

170

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|4.29.5 |  | Additional Agreement No. 5, dated March 11, 2006, to contract on network connection between Rostelecom and Uralsvyazinform, dated January 1, 2006(5)+                                               
|------ |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|4.29.6 |  | Additional Agreement No. 6, dated March 11, 2006, to contract on network connection between Rostelecom and Uralsvyazinform, dated January 1, 2006(5)+                                               
|4.29.7 |  | Additional Agreement No. 7, dated March 11, 2006, to contract on network connection between Rostelecom and Uralsvyazinform, dated January 1, 2006(5)+                                               
|4.29.8 |  | Additional Agreement No. 8, dated March 26, 2007, to contract on network connection between Rostelecom and Uralsvyazinform, dated January 1, 2006+                                                  
|4.29.9 |  | Version 2 of Appendix No. 5 to contract on network connection between Rostelecom and Uralsvyazinform, dated January 1, 2006(5)+                                                                     
|4.30   |  | Service Provision Agreement No. 752-05-23, dated January 1, 2006, between Rostelecom and Uralsvyazinform(5)+                                                                                        
|4.30.1 |  | Additional Agreement No. 1, dated January 1, 2006, to Service Provision Agreement No. 752-05-23, dated January 1, 2006, between Rostelecom and Uralsvyazinform(5)+                                  
|4.30.2 |  | Additional Agreement No. 2, dated January 1, 2006, to Service Provision Agreement No. 752-05-23, dated January 1, 2006, between Rostelecom and Uralsvyazinform(5)+                                  
|4.31   |  | Agency Agreement No. 55-06-23, dated June 9, 2006, between Rostelecom and Southern Telecommunications Company+                                                                                      
|4.31.1 |  | Appendix No. 1 (Form 1) to Agency Agreement No. 55-06-23, dated June 9, 2006, between Rostelecom and Southern Telecommunications Company+                                                           
|4.31.2 |  | Appendix No. 1 (Form 2) to Agency Agreement No. 55-06-23, dated June 9, 2006, between Rostelecom and Southern Telecommunications Company+                                                           
|4.31.3 |  | Appendix No. 2 to Agency Agreement No. 55-06-23, dated June 9, 2006, between Rostelecom and Southern Telecommunications Company+                                                                    
|4.32   |  | Agreement, dated January 1, 2006, on Amendments to Network Interconnection Contract No. 1, dated August 1, 2003, between Rostelecom and Southern Telecommunications Company(5)+                     
|4.32.1 |  | Additional Agreement No. 1, dated June 9, 2006, to Agreement, dated January 1, 2006, on Amendments to Network Interconnection Contract between Rostelecom and Southern Telecommunications Company+  
|4.32.2 |  | Additional Agreement No. 2, dated March 20, 2007, to Agreement, dated January 1, 2006, on Amendments to Network Interconnection Contract between Rostelecom and Southern Telecommunications Company+
|4.33   |  | Service Provision Agreement No. 750-05-23, dated January 1, 2006, between Rostelecom and Southern Telecommunications Company(5)+                                                                    
|4.34   |  | Agency Agreement No. 6595/06-D(59-06-23), dated January 1, 2006, between Rostelecom and CenterTelecom+                                                                                              
|4.34.1 |  | Appendix No. 1 (Form 1) to Agency Agreement No. 6595/06-DO(59-06-23), dated January 1, 2006, between Rostelecom and CenterTelecom+                                                                  
|       |  |                                                                                                                                                                                                     

171

---



|4.34.2 |  | Appendix No. 1 (Form 2) to Agency Agreement No. 6595/06-DO(59-06-23), dated January 1, 2006, between Rostelecom and CenterTelecom+                                             
|------ |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|4.34.3 |  | Appendix No. 2 to Agency Agreement No. 6595/06-DO(59-06-23), dated January 1, 2006, between Rostelecom and CenterTelecom+                                                      
|4.34.4 |  | Appendix No. 3 to Agency Agreement No. 6595/06-DO(59-06-23), dated January 1, 2006, between Rostelecom and CenterTelecom+                                                      
|4.35   |  | Agreement, dated January 1, 2006, on Amendments to Network Interconnection Contract No. CF-00-00-1100, dated August 1, 2003, between Rostelecom and CenterTelecom(5)+          
|4.35.1 |  | Additional Agreement No. 1, dated August 25, 2006, to Agreement, dated January 1, 2006, on Amendments to Network Interconnection Contract between Rostelecom and CenterTelecom+
|4.35.2 |  | Additional Agreement No. 2, dated August 25, 2006, to Agreement, dated January 1, 2006, on Amendments to Network Interconnection Contract between Rostelecom and CenterTelecom+
|4.35.3 |  | Additional Agreement No. 3, dated August 25, 2006, to Agreement, dated January 1, 2006, on Amendments to Network Interconnection Contract between Rostelecom and CenterTelecom+
|4.35.4 |  | Additional Agreement No. 4, dated August 25, 2006, to Agreement, dated January 1, 2006, on Amendments to Network Interconnection Contract between Rostelecom and CenterTelecom+
|4.35.5 |  | Additional Agreement No. 5, dated August 25, 2006, to Agreement, dated January 1, 2006, on Amendments to Network Interconnection Contract between Rostelecom and CenterTelecom+
|4.35.6 |  | Additional Agreement No. 6, dated August 25, 2006, to Agreement, dated January 1, 2006, on Amendments to Network Interconnection Contract between Rostelecom and CenterTelecom+
|4.35.7 |  | Additional Agreement No. 7, dated August 25, 2006, to Agreement, dated January 1, 2006, on Amendments to Network Interconnection Contract between Rostelecom and CenterTelecom+
|4.35.8 |  | Additional Agreement No. 8, dated August 25, 2006, to Agreement, dated January 1, 2006, on Amendments to Network Interconnection Contract between Rostelecom and CenterTelecom+
|4.36   |  | Service Provision Agreement No. 749-05-23, dated January 1, 2006, between Rostelecom and CenterTelecom(5)+                                                                     
|4.36.1 |  | Additional Agreement No. 1 to the Contract between OAO Rostelecom and OJSC CenterTelecom No. 6479/05-D(749-05-23) dated January 01, 2006+                                      
|4.36.2 |  | Additional Agreement No. 2 to the Contract between OAO Rostelecom and OJSC CenterTelecom No. 6479/05-D(749-05-23) dated January 01, 2006+                                      
|4.37   |  | Agency Agreement No.35-06-23, dated November 1, 2006, between Rostelecom and North-West Telecom+                                                                               
|8.1    |  | List of subsidiaries of Rostelecom                                                                                                                                             
|       |  |                                                                                                                                                                                

172

---



|11.1 |  | The Code of Ethics of Rostelecom(4)+                                                                                             
|---- |  | ---------------------------------------------------------------------------------------------------------------------------------
|12.1 |  | Certification of the CEO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                               
|12.2 |  | Certification of the CFO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                               
|13.1 |  | Certification of the CEO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|13.2 |  | Certification of the CEO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

---

+ English translation.

173

---





SIGNATURES

The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized
the undersigned to sign this annual report on its behalf.

|                        |  | OPEN JOINT STOCK COMPANY LONG-DISTANCE AND INTERNATIONAL TELECOMMUNICATIONS ROSTELECOM
|----------------------- |  | --------------------------------------------------------------------------------------
|Date: December 17, 2007 |  |                                                                                       
|                        |  | By:                                                                                   
|                        |  |                                                                                       
|                        |  |                                                                                       
|                        |  | By:                                                                                   
|                        |  |                                                                                       
|                        |  |                                                                                       

174

---





OAO ROSTELECOM        CONSOLIDATED FINANCIAL STATEMENTS  PREPARED IN ACCORDANCE WITH  INTERNATIONAL FINANCIAL REPORTING STANDARDS

FOR THE YEAR ENDED DECEMBER 31, 2006

INDEX



|                                                       
|-------------------------------------------------------
|Statement of Directors' Responsibilities               
|Report of Independent Registered Public Accounting Firm
|Consolidated Balance Sheets                            
|Consolidated Statements of Income                      
|Consolidated Statements of Cash Flows                  
|Consolidated Statements of Changes in Equity           
|Notes to Consolidated Financial Statements             

F-1

---





STATEMENT OF DIRECTORS' RESPONSIBILITIES

To the Shareholders of OAO Rostelecom

For
and on behalf of the Board of Directors:

/s/
Vladimir V. Terekhov,
Acting General Director

OAO
Rostelecom
1st Tverskaya-Yamskaya, 14,
Moscow
Russian Federation

December 14,
2007

F-2

---



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Shareholders of OAO Rostelecom

We
have audited the accompanying consolidated balance sheets of OAO Rostelecom, an open joint stock company, and subsidiaries (hereinafter referred to as the "Group") as of
December 31, 2006, 2005 and 2004, and the related consolidated statements of income, cash flows and changes in equity for each of the three years in the period ended December 31, 2006.
These financial statements are the responsibility of the Group's management. Our responsibility is to express an opinion on these financial statements based on our audits.

We
conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in
the
financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In
our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Group at December 31, 2006, 2005
and 2004 and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2006 in conformity with International Financial Reporting
Standards as published by the International Accounting Standards Board.

International
Financial Reporting Standards vary in certain significant respects from accounting principles generally accepted in the United States of America. Information relating to
the nature and effect of such differences is presented in Note 33 to the consolidated financial statements.

We
also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Group's internal control over financial
reporting as of December 31, 2006, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our
report dated December 14, 2007 expressed an unqualified opinion on management's assessment, and an adverse opinion on the effectiveness of the Group's internal control over financial reporting.
Subsequent to the July 19, 2007 issuance of our previous report disclaiming opinions on management's incomplete assessment and on the effectiveness of the Group's internal controls over
financial reporting, the Group completed its 2006 assessment of the effectiveness of the Group's internal control over financial reporting.

/s/
ERNST & YOUNG LLC
Moscow, Russia
December 14, 2007

F-3

---





OAO ROSTELECOM        CONSOLIDATED BALANCE SHEETS        (In millions of Russian Rubles)

|                                                          |  |    |  | December 31,
|--------------------------------------------------------- |  | -- |  | ------------
|
|ASSETS                                                    |  |    |  |             
|Non-current assets                                        |  |    |  |             
|Property, plant and equipment                             |  | 6  |  | 39,186      
|Goodwill and other intangible assets                      |  | 7  |  | 2,795       
|Investments in associates                                 |  | 9  |  | 330         
|Long-term financial investments                           |  | 10 |  | 5,728       
|Other non-current assets                                  |  |    |  | 71          
|                                                          |  |    |  |             
|Total non-current assets                                  |  |    |  | 48,110      
|                                                          |  |    |  |             
|Current assets                                            |  |    |  |             
|Inventory                                                 |  |    |  | 564         
|Accounts receivable                                       |  | 11 |  | 8,821       
|Prepaid income tax                                        |  |    |  | 154         
|Short-term investments                                    |  | 12 |  | 8,496       
|Cash and cash equivalents                                 |  | 13 |  | 2,353       
|                                                          |  |    |  |             
|Total current assets                                      |  |    |  | 20,388      
|                                                          |  |    |  |             
|Total assets                                              |  |    |  | 68,498      
|                                                          |  |    |  |             
|EQUITY AND LIABILITIES                                    |  |    |  |             
|Equity attributable to equity holders of the parent       |  |    |  |             
|Share capital                                             |  | 14 |  | 100         
|Retained earnings including other reserves                |  |    |  | 50,820      
|                                                          |  |    |  |             
|Total equity attributable to equity holders of the parent |  |    |  | 50,920      
|                                                          |  |    |  |             
|Minority interest                                         |  |    |  | 25          
|                                                          |  |    |  |             
|Total equity                                              |  |    |  | 50,945      
|                                                          |  |    |  |             
|Non-current liabilities                                   |  |    |  |             
|Long-term loansnet of current portion                    |  | 18 |  | 298         
|Non-current portion of finance lease payable              |  | 16 |  | 427         
|Non-current accounts payable                              |  | 15 |  | 326         
|Non-current portion of vendor financing payable           |  | 17 |  | 362         
|Deferred tax liability                                    |  | 20 |  | 3,444       
|                                                          |  |    |  |             
|Total non-current liabilities                             |  |    |  | 4,857       
|                                                          |  |    |  |             
|Current liabilities                                       |  |    |  |             
|Accounts payable, provisions and accrued expenses         |  | 15 |  | 7,372       
|Finance lease payable                                     |  | 16 |  | 78          
|Taxes payable                                             |  |    |  | 426         
|Vendor financing payable                                  |  | 17 |  | 1,640       
|Current portion of long-term loans                        |  | 18 |  | 3,005       
|Short-term borrowings                                     |  | 19 |  | 175         
|                                                          |  |    |  |             
|Total current liabilities                                 |  |    |  | 12,696      
|                                                          |  |    |  |             
|Total liabilities                                         |  |    |  | 17,553      
|                                                          |  |    |  |             
|Total equity and liabilities                              |  |    |  | 68,498      
|                                                          |  |    |  |             

The notes on pages F-8 to F-72 are an integral part of these consolidated financial statements.

F-4

---



OAO Rostelecom        CONSOLIDATED STATEMENTS OF INCOME        (In millions of Russian Rubles unless otherwise stated)

|                                                                                  |  |      |  | Year ended December 31, |  
|--------------------------------------------------------------------------------- |  | ---- |  | ----------------------- | -
|
|Revenue                                                                           |  |      |  |                         |  
|Telephone traffic                                                                 |  |      |  | 49,121                  |  
|Rent of channels                                                                  |  |      |  | 7,116                   |  
|Other revenue                                                                     |  |      |  | 5,322                   |  
|                                                                                  |  |      |  |                         |  
|Total revenue                                                                     |  | 21   |  | 61,559                  |  
|                                                                                  |  |      |  |                         |  
|Operating expenses                                                                |  |      |  |                         |  
|Wages, salaries, other benefits and payroll taxes                                 |  | 24   |  | (7,147                  | )
|Depreciation and amortization                                                     |  | 6, 7 |  | (8,418                  | )
|Impairment of property, plant and equipment and goodwill                          |  | 6, 7 |  |                        |  
|Charges by network operatorsinternational                                        |  |      |  | (7,304                  | )
|Charges by network operatorsnational                                             |  | 3    |  | (29,355                 | )
|Administration and other costs                                                    |  | 23   |  | (5,553                  | )
|Taxes other than on income                                                        |  |      |  | (621                    | )
|Repairs and maintenance                                                           |  |      |  | (866                    | )
|Bad debt (expense)/recovery                                                       |  | 11   |  | (389                    | )
|Loss on sale of property, plant and equipment                                     |  |      |  | (601                    | )
|                                                                                  |  |      |  |                         |  
|Total operating expenses                                                          |  |      |  | (60,254                 | )
|                                                                                  |  |      |  |                         |  
|Operating profit                                                                  |  |      |  | 1,305                   |  
|                                                                                  |  |      |  |                         |  
|Income/(loss) from associates                                                     |  | 9    |  | 19                      |  
|Interest expense                                                                  |  |      |  | (133                    | )
|Interest income                                                                   |  |      |  | 900                     |  
|Income from sale of investments                                                   |  |      |  | 52                      |  
|Other non-operating income, net                                                   |  |      |  | 81                      |  
|Foreign exchange gain/(loss), net                                                 |  |      |  | 219                     |  
|                                                                                  |  |      |  |                         |  
|Profit before tax                                                                 |  |      |  | 2,443                   |  
|                                                                                  |  |      |  |                         |  
|Current tax charge                                                                |  |      |  | (2,411                  | )
|Deferred tax benefit                                                              |  |      |  | 1,424                   |  
|                                                                                  |  |      |  |                         |  
|Income tax expense                                                                |  | 20   |  | (987                    | )
|                                                                                  |  |      |  |                         |  
|Profit for the period                                                             |  |      |  | 1,456                   |  
|                                                                                  |  |      |  |                         |  
|Attributable to:                                                                  |  |      |  |                         |  
|Equity holders of the parent                                                      |  |      |  | 1,458                   |  
|Minority interest                                                                 |  |      |  | (2                      | )
|                                                                                  |  |      |  |                         |  
|                                                                                  |  |      |  | Rubles                  |  
|Earnings per share attributable to equity holders of the parentbasic and diluted |  | 25   |  | 1.50                    |  

The notes on pages F-8 to F-72 are an integral part of these consolidated financial statements.

F-5

---





OAO Rostelecom        CONSOLIDATED STATEMENTS OF CASH FLOWS        (In millions of Russian Rubles)

|                                                                                    |  |      |  | Year ended December 31, |  
|----------------------------------------------------------------------------------- |  | ---- |  | ----------------------- | -
|
|Cash flows from operating activities                                                |  |      |  |                         |  
|Profit before tax                                                                   |  |      |  | 2,443                   |  
|Adjustments to reconcile net income before tax to cash generated                    |  |      |  |                         |  
|from operating activities:                                                          |  |      |  |                         |  
|Depreciation and amortization                                                       |  | 6, 7 |  | 8,418                   |  
|Impairment losses                                                                   |  | 6    |  |                        |  
|Bad debt expense/(recovery)                                                         |  | 11   |  | 389                     |  
|(Income)/loss from associates                                                       |  | 9    |  | (19                     | )
|Loss on sale of property, plant and equipment                                       |  |      |  | 601                     |  
|Income from sale of investments                                                     |  |      |  | (52                     | )
|Net interest and other non-operating income                                         |  |      |  | (848                    | )
|Other non-monetary expense                                                          |  |      |  |                        |  
|Foreign exchange (gain)/loss, net                                                   |  |      |  | (219                    | )
|Changes in net working capital:                                                     |  |      |  |                         |  
|(Increase)/decrease in accounts receivable                                          |  |      |  | (4,242                  | )
|Decrease/(increase) in inventories                                                  |  |      |  | 198                     |  
|Increase/(decrease) in payables and accruals                                        |  |      |  | 2,449                   |  
|                                                                                    |  |      |  |                         |  
|Cash generated from operations                                                      |  |      |  | 9,118                   |  
|Interest paid                                                                       |  |      |  | (426                    | )
|Interest received                                                                   |  |      |  | 778                     |  
|Income tax paid                                                                     |  |      |  | (2,049                  | )
|                                                                                    |  |      |  |                         |  
|Net cash provided by operating activities                                           |  |      |  | 7,421                   |  
|                                                                                    |  |      |  |                         |  
|Cash flows from investing activities                                                |  |      |  |                         |  
|Purchase of property, plant and equipment and intangible assets                     |  |      |  | (7,177                  | )
|Proceeds from sale of property, plant and equipment                                 |  |      |  | 414                     |  
|Purchase of available-for-sale investments, net                                     |  |      |  |                        |  
|Purchase of financial assets, other than available-for-sale investments             |  |      |  | (14,594                 | )
|Proceeds from sale of available-for-sale investments, net of direct costs           |  |      |  | 67                      |  
|Proceeds from sale of investment other than available-for-sale, net of direct costs |  |      |  | 18,218                  |  
|Dividends received from associates                                                  |  |      |  | 97                      |  
|Cash acquired as a result of obtaining control over GlobalTel                       |  |      |  |                        |  
|Purchase of subsidiaries, net of cash acquired                                      |  |      |  | (1,481                  | )
|                                                                                    |  |      |  |                         |  
|Net cash used in investing activities                                               |  |      |  | (4,456                  | )
|                                                                                    |  |      |  |                         |  
|Cash flows from financing activities                                                |  |      |  |                         |  
|Drawdown of interest bearing loans                                                  |  |      |  | 898                     |  
|Repayment of interest bearing loans                                                 |  |      |  | (1,297                  | )
|Repayment of lease obligations                                                      |  |      |  | (55                     | )
|Repayment of vendor financing payable                                               |  |      |  | (711                    | )
|Dividends paid                                                                      |  |      |  | (1,839                  | )
|                                                                                    |  |      |  |                         |  
|Net cash provided by/(used in) financing activities                                 |  |      |  | (3,004                  | )
|                                                                                    |  |      |  |                         |  
|Effect of exchange rate changes on cash and cash equivalents                        |  |      |  | (6                      | )
|                                                                                    |  |      |  |                         |  
|Net (decrease)/increase in cash and cash equivalents                                |  |      |  | (45                     | )
|Cash and cash equivalents at beginning of year                                      |  |      |  | 2,398                   |  
|                                                                                    |  |      |  |                         |  
|Cash and cash equivalents at the end of year                                        |  |      |  | 2,353                   |  
|                                                                                    |  |      |  |                         |  
|Non-monetary transactions:                                                          |  |      |  |                         |  
|Non-cash additions to property, plant and equipment and intangible assets           |  |      |  | 962                     |  

The notes on pages F-8 to F-72 are an integral part of these consolidated financial statements.

F-6

---



OAO Rostelecom        CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY        (In millions of Russian Rubles)

|                                                                      |                                                              |    |  | Attributable to equity holders of the parent |   |       |       |        |  
|--------------------------------------------------------------------- | ------------------------------------------------------------ | -- |  | -------------------------------------------- | - | ----- | ----- | ------ | -
|
|Balance at December 31, 2003                                          |                                                              |    |  | 100                                          |   | 363   |       | 47,507 |  
|Available-for-sale investments                                        |                                                              |    |  |                                              |   |       |       |        |  
|                                                                      | Valuation gain on available-for-sale investments, net of tax |    |  |                                              |  |       | 32    |        | 
|                                                                      |                                                              |    |  |                                              |   |       |       |        |  
|Total income and expense for the period recognized directly in equity |                                                              |    |  |                                             |   | 32    |       |       |  
|Profit for the period                                                 |                                                              |    |  |                                             |   |      |       | 4,266  |  
|                                                                      |                                                              |    |  |                                              |   |       |       |        |  
|Total income and expense                                              |                                                              |    |  |                                             |   | 32    |       | 4,266  |  
|Minority interest in disposed subsidiaries                            |                                                              |    |  |                                             |   |      |       |       |  
|Dividends                                                             |                                                              |    |  |                                             |   |      |       | (1,430 | )
|                                                                      |                                                              |    |  |                                              |   |       |       |        |  
|Balance at December 31, 2004                                          |                                                              |    |  | 100                                          |   | 395   |       | 50,343 |  
|Effect of obtaining control over GlobalTel                            |                                                              | 5  |  |                                             |   |      |       | (826   | )
|Available-for-sale investments                                        |                                                              |    |  |                                              |   |       |       |        |  
|                                                                      | Valuation gain on available-for-sale investments, net of tax |    |  |                                              |  |       | 736   |        | 
|                                                                      | Transferred to profit on sale                                |    |  |                                              |  |       | (243  | )      | 
|                                                                      |                                                              |    |  |                                              |   |       |       |        |  
|Total income and expense for the period recognized directly in equity |                                                              |    |  |                                             |   | 493   |       |       |  
|Profit for the period                                                 |                                                              |    |  |                                             |   |      |       | 978    |  
|                                                                      |                                                              |    |  |                                              |   |       |       |        |  
|Total income and expense                                              |                                                              |    |  |                                             |   | 493   |       | 978    |  
|Dividends                                                             |                                                              | 14 |  |                                             |   |      |       | (1,786 | )
|                                                                      |                                                              |    |  |                                              |   |       |       |        |  
|Balance at December 31, 2005                                          |                                                              |    |  | 100                                          |   | 888   |       | 48,709 |  
|Minority interest in purchased subsidiaries                           |                                                              |    |  |                                             |   |      |       |       |  
|Available-for-sale investments                                        |                                                              |    |  |                                              |   |       |       |        |  
|                                                                      | Valuation gain on available-for-sale investments, net of tax |    |  |                                              |  |       | 1,806 |        | 
|                                                                      |                                                              |    |  |                                              |   |       |       |        |  
|Total income and expense for the period recognized directly in equity |                                                              |    |  |                                             |   | 1,806 |       |       |  
|Profit for the period                                                 |                                                              |    |  |                                             |   |      |       | 1,458  |  
|                                                                      |                                                              |    |  |                                              |   |       |       |        |  
|Total income and expense                                              |                                                              |    |  |                                             |   | 1,806 |       | 1,458  |  
|Dividends                                                             |                                                              | 14 |  |                                             |   |      |       | (2,041 | )
|                                                                      |                                                              |    |  |                                              |   |       |       |        |  
|Balance at December 31, 2006                                          |                                                              |    |  | 100                                          |   | 2,694 |       | 48,126 |  
|                                                                      |                                                              |    |  |                                              |   |       |       |        |  

The notes on pages F-8 to F-72 are an integral part of these consolidated financial statements

F-7

---





OAO ROSTELECOM        NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  FOR THE YEAR ENDED DECEMBER 31, 2006        (In millions of Russian Rubles unless otherwise stated)

1.     REPORTING ENTITY

These consolidated financial statements are presented by OAO Rostelecom ("Rostelecom" or the "Company"), and its subsidiaries (together the "Group"), which
are incorporated in the Russian Federation ("Russia"). The principal activity of the Group is to provide domestic (DLD) and international (ILD) long-distance telecommunications services to
the Government, businesses and individuals of Russia. The Group operates the main intercity network and the international telecommunications gateways of the Russian Federation, carrying traffic that
originates in other national and international operators' networks to other national and international operators for termination.

The
Company's headquarters are located in Moscow at 1st Tverskaya-Yamskaya Street, 14.

These
consolidated financial statements incorporate the results of operations of the Company and its subsidiaries, as detailed in Note 8.

Rostelecom
was established as an open joint stock company on September 23, 1993 in accordance with the Directive of the State Committee on the Management of State Property of
Russia No. 1507-r, dated August 27, 1993. As of December 31, 2006, the Government of the Russian Federation controlled indirectly 50.67% of the voting share capital of
the Company, by virtue
of its 75% less one share direct holding in OAO Svyazinvest ("Svyazinvest"), the parent company of Rostelecom.

2.     BASIS OF PRESENTATION

These consolidated financial statements have been prepared in accordance with and comply with International Financial Reporting Standards ("IFRS").

The
Group maintains its accounting records and prepares its statutory accounting reports in accordance with Russian accounting legislation and instructions in Russian Rubles (Rbl). These
consolidated financial statements are based on the underlying accounting records, appropriately adjusted and reclassified for fair presentation in accordance with the standards and interpretations
prescribed by the International Accounting Standards Board ("IASB").

The
consolidated financial statements have been prepared using the historical cost convention, except for restatement of property, plant and equipment for the effects of inflation up to
December 31, 2002, and modified by the initial valuation of property, plant and equipment and measurement of available-for-sale investments at fair value (refer to
Note 4). The functional currency of the Company and each of its subsidiaries and the reporting currency for these consolidated financial statements is the Russian Ruble (Rbl).

3.     OPERATING ENVIRONMENT OF THE GROUP

General

Whilst there have been improvements in the Russian economic situation, such as an increase in gross domestic product and a reduced rate of inflation, Russia
continues economic reforms and development of its legal, tax and regulatory frameworks as required by a market economy. The future stability of the Russian economy is largely dependent upon these
reforms and developments and the effectiveness of economic, financial and monetary measures undertaken by the government.

F-8

---



New scheme of settlements with regional subscribers and operators

In 2005 a set of new rules and regulations in the national telecommunications sector was enacted by the Ministry of Information Technologies and Communications as
part of the regulatory reform and restructuring of the national telecommunications sector aimed to facilitate competition and make the industry more attractive for investors. New rules and regulations
resulted in change of the Group's status as a monopoly supplier of long-distance and international telecommunications services, effective January 1, 2006. The new regulations
allowed telecommunications operators to apply for long-distance telecommunications licenses, two alternative operators received the respective licenses and started providing
long-distance and international communication services during 2006.

Before
January 1, 2006 the Group provided long-distance traffic transit services to Svyazinvest inter-regional telecommunications companies (IRCs) and to other Russian
operators. In Moscow the Group provided long-distance services to subscribers directly. In every region of the Russian Federation, Svyazinvest IRCs and other operators independently billed
for long-distance services provided to their local network subscribers (except for subscribers in Moscow). The operators settled with the Group for long-distance call transit
and termination services, and the Group, in turn, paid the respective operator for call termination services. In Moscow the Group billed subscribers for long-distance services directly.
Starting January 1, 2006, in accordance with the new regulations, the Group bills end users for long-distance services directly charging them the full tariffs, previously charged by
the IRCs and other operators. This led to a significant increase in revenue for the year ended December 31, 2006 and accounts receivable as of December 31, 2006, as compared to the
revenues for the year ended December 31, 2005 and accounts receivable as of December 31, 2005 (refer to Notes 11 and 21).

Currently,
the Group does not have at its disposal sufficient staff and other resources to process, prepare and analyze source documents, maintain information systems, issue bills, and
collect payments to the full extent necessary. In order to perform activities and ensure the corresponding infrastructure to conform to the new regulatory requirements, effective January 1,
2006, the Group entered into service contracts with Svyazinvest IRCs and other operators of local and intra-regional networks to act as the Company's regional agents. Contracted services include
customer services to end users, invoicing, and collection of payments for long-distance services provided by the Group. While relying on resources and data supplied by contracted service
providers in calculating charges for long-distance services, the Group bears responsibility for calculating charges in compliance with applicable regulations. Moreover, during 2006 the
Group started performing subscriber billing and collection activities directly in relation to the largest subscribers located outside Moscow.

As
a result, during the year ended December 31, 2006 in addition to the fees paid for call termination services, the Group also incurred agent fees in connection with the service
contracts amounted to 6,647 which included in charges by national network operators in the consolidated statement of income for the year ended December 31, 2006. In addition, the new
legislation introduced compensation payments which are to be made by the Group to IRC as a reimbursement for the expected reduction in their profitability. Charges by national network operators in the
consolidated statement of income include 4,397 of such compensation payments, which are incurred by the Group

F-9

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during
2006. The legislation stipulates that these payments are only enacted for the period from January 1, 2006 to January 1, 2008.

Management
believes that revenues are stated fairly. At the same time management considers that the Group faces the following risks as a result of change in the settlement scheme:



Management
believes that the above mentioned risks do not require adjustments to the consolidated financial statements. Such adjustments would be recognized in the consolidated financial
statements in the period in which they occur if sufficient information exists to estimate their amount reliably.

Taking
into consideration the extremely short period passed since the new rules in the telecommunications sector came into force as well as significant uncertainty in interpretation of
the new telecommunications legislation, it is possible that the rules will be partly revised in future.

The
tables below summarize the effect of changes in telecommunications legislation on the Group's assets, liabilities, revenues and related expenses:

|                                                  |  | December 31, |  
|------------------------------------------------- |  | ------------ | -
|
|Accounts receivable                               |  |              |  
|Local operators                                   |  | 729          |  
|Subscribers                                       |  | 2,756        |  
|Accounts payable, provisions and accrued expenses |  |              |  
|Local operators                                   |  | (1,970       | )
|Subscribers                                       |  | (348         | )
|                                                  |  |              |  
|Net effect                                        |  | 1,167        |  
|                                                  |  |              |  

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|                                         |  | Year ended December 31, |  
|---------------------------------------- |  | ----------------------- | -
|
|Revenue from telecommunications services |  |                         |  
|Local operators                          |  | 520                     |  
|Subscribers                              |  | 34,985                  |  
|Charges by network operatorsnational    |  |                         |  
|Agent fees                               |  | (6,647                  | )
|Interconnection fees                     |  | (18,111                 | )
|Bad debt expense                         |  | (369                    | )
|                                         |  |                         |  
|Net effect                               |  | 10,378                  |  
|                                         |  |                         |  

Inflation

The Russian economy has been characterized by relatively high rates of inflation. The following table summarizes the annual rate of inflation for the past
three years:

|For the year ended December 31, |  | Annual inflation
|------------------------------- |  | ----------------
|2006                            |  | 9.0%            
|2005                            |  | 10.9%           
|2004                            |  | 11.7%           

---

Source: Federal Service of Public Statistics

4.     PRINCIPAL ACCOUNTING POLICIES

Set out below are the principal accounting policies used to prepare these consolidated financial statements:

Changes in Accounting Policies

The accounting policies adopted are consistent with those of the previous financial year except that the Group has adopted those new/revised standards mandatory
for financial years beginning on or after January 1, 2006. The changes in accounting policies result from adoption of the following new or revised standards:



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The
adoption of these standards and interpretations did not have material impact on the Group's results of operations, financial position and cash flows.

Significant Accounting Judgments and Estimates

The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The most significant estimates
relate to the recoverability and depreciable lives of property, plant and equipment, fair values of assets and liabilities acquired in business combinations, post employment benefits, allowance for
doubtful accounts, and deferred taxation. Actual results could differ from these estimates.

The
key assumptions concerning the future and other key sources of estimation uncertainty at the balance sheet date, that have a significant risk of causing a material adjustment to the
carrying amounts of assets and liabilities within the next financial year are discussed below:

Impairment of Property, Plant and Equipment

The Group assesses at each reporting date whether there is any indication that an asset may be impaired. If any such indication exists, or when annual impairment
testing for an asset is required, the Group makes an estimate of the assets' recoverable amount. An asset's recoverable amount is higher of an asset's or cash-generating unit's fair value
less costs to sell and its value in use and is determined for an individual asset, unless the asset does not generate cash inflows that are largely independent of those from other assets or group of
assets. Where the carrying amount of an asset exceeds its recoverable amount, the asset is considered impaired and is written down to its recoverable amount. 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 assessment of the time value of money and the risks specific to the
assets. In 2005, the Group recognized an impairment loss of 4,970 (refer to Notes 6 and 7) related to the impact of the new rules and regulations of the regulatory reform and
restructuring of the national telecommunications sector as discussed in detail in Note 3. Based on management's analysis there were no indicators of impairment of assets or release of
impairment losses of the previous year as of December 31, 2006.

The
determination of impairment of property, plant and equipment involves the use of estimates that include, but are not limited to, the cause, timing and amount of the impairment.
Impairment is based on a large number of factors, such as changes in current competitive conditions, expectations of growth in the telecommunications industry, increased cost of capital, changes in
the future availability of financing, technological obsolescence, discontinuance of service, current replacement costs and other changes in circumstances that indicate an impairment exists. The
recoverable amount and the fair

F-12

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values
are typically determined using a discounted cash flow method which incorporates reasonable market participant assumptions. The identification of impairment indicators, the estimation of future
cash flows and the determination of fair values for assets (or group of assets) requires management to make significant judgments concerning the identification and validation of impairment indicators,
expected cash flows, applicable discount rates, useful lives and residual values. Methods used to determine the value in use include discounted cash flow-based methods and methods that use
quoted stock market prices as a basis. These estimates, including the methodologies used, can have a material impact on the fair value and ultimately the amount of any property, plant and equipment
impairment.

Useful Lives of Items of Property, Plant and Equipment

The Group assesses the remaining useful lives of items of property, plant and equipment at least at each financial year-end and, if expectations
differ from previous estimates, the changes are accounted for as a change in an accounting estimate in accordance with IAS 8 "Accounting Policies, Changes in Accounting Estimates
and Errors".

Fair Values of Assets and Liabilities Acquired in Business Combinations

The Group is required to recognize separately, at the acquisition date, the identifiable assets, liabilities and contingent liabilities acquired or assumed in the
business combination at their fair values, which involves estimates. Such estimates are based on valuation techniques, which require considerable judgment in forecasting future cash flows and
developing other assumptions.

Site Restoration Provisions

The Group reviews site restoration provisions at each balance sheet date and adjusts them to reflect the current best estimate in accordance with IFRIC 1
"Changes in Existing Decommissioning,
Restoration and Similar Liabilities". The amount recognized as a provision is the best estimate of the expenditure required to settle the present obligation at the balance sheet date. The risks and
uncertainties that inevitably surround many events and circumstances are taken into account in reaching the best estimate of a provision. Considerable judgment is required in forecasting future site
restoration costs. Future events that may affect the amount required to settle an obligation are reflected in the amount of a provision where there is sufficient objective evidence that they
will occur.

Post-Employment Benefits

The Group uses actuarial valuation method for measurement of the present value of defined post-employment benefit obligations and related current
service cost (refer to Note 24). This involves the use of demographic assumptions about the future characteristics of current and former employees who are eligible for benefits (mortality, both
during and after employment, rates of employee turnover, etc.) as well as financial assumptions (discount rate, future salary and benefit levels, etc.).

F-13

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Allowances

The Group makes allowances for doubtful accounts receivable. Significant judgment is used to estimate doubtful accounts. In estimating doubtful accounts
historical and anticipated customer performance are considered. Changes in the economy, industry, or specific customer conditions may require adjustments to the allowance for doubtful accounts
recorded in the consolidated financial statements. As of December 31, 2006, 2005 and 2004, allowances for doubtful accounts have been created in the amount of 1,594, 1,371 and 2,284,
respectively (refer to Note 11).

Goodwill

The Group determines whether goodwill is impaired on an annual basis. This requires an estimation of the value in use of the cash-generating unit(s)
to which goodwill is allocated. Estimating the value in use requires the Group to make an estimate of expected future cash flows from the cash-generating unit and also to choose a suitable
discount rate in order to calculate present value of those cash flows. As at the reporting date the Group estimated the value in use of cash-generating units higher than the carrying
amount of their net assets including
goodwill. Thus, no impairment losses were recognized at December 31, 2006. The carrying amount of goodwill as of December 31, 2006 is 939. More details are provided in Note 7.

Litigations

The Group exercises considerable judgment in measuring and recognizing provisions and the exposure to contingent liabilities related to pending litigations or
other outstanding claims subject to negotiated settlement, mediation, arbitration or government regulation, as well as other contingent liabilities. Judgment is necessary in assessing the likelihood
that a pending claim will succeed, or a liability will arise, and to quantify the possible range of the final settlement. Because of the inherent uncertainties in this evaluation process, actual
losses may be different from the originally estimated provision. These estimates are subject to change as new information becomes available, primarily with the support of internal specialists, if
available, or with the support of outside consultants, such as actuaries or legal counsel. Revisions to the estimates may significantly affect future operating results.

Principles of consolidation

The consolidated financial statements of the Group comprise the financial statements of the Company and its subsidiaries.

A
subsidiary is an entity that is controlled by the Company, either through ownership, directly or indirectly, of more than 50% of the voting share capital of the entity, or by other
means. Subsidiaries are consolidated from the date on which control is transferred to the Group and are no longer consolidated from the date that control ceases.

All
inter-company transactions, balances and unrealized gains on transactions between companies of the Group are eliminated; unrealized losses are also eliminated unless the transaction
provides evidence of an impairment of the asset transferred.

F-14

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Where
necessary, accounting policies for subsidiaries have been adjusted to conform to the policies adopted by the Group.

Losses
allocated to minority interest do not exceed the minority interest in the equity of the subsidiary unless there is a binding obligation of the minority to fund the losses. All
extra losses are allocated to the Group.

Companies
where the Group owns more than 50% of the voting share capital but the minority shareholder enjoys substantive participation rights and has effective veto rights that would
prevent the Group from taking decisions that are significant in the ordinary course of business, i.e. the Group is unable to exercise control, are accounted for under the equity method.

Associates
in which the Group has significant influence but not a controlling interest are accounted for using the equity method of accounting. Significant influence is usually
demonstrated by the Group owning, directly or indirectly, between 20% and 50% of the voting ownership interest or by power to participate in the financial and operating policy decisions of associates.
The Group's share of the net income or losses of associates is included in the consolidated statement of income, the Group's share of movement in reserves is recognized in equity and the Group's share
of the net assets of associates is included in the consolidated balance sheet.

An
assessment of investments in associates for possible impairment or reversal of impairment recognized previously is performed when there is an indication that the asset has been
impaired or the impairment losses recognized in prior years no longer exist. When the Group's share of losses exceeds the carrying amount of the investment, the investment is reported at nil value and
recognition of losses is discontinued except to the extent of the Group's commitment to fund future losses. Unrealized profits that arise from transactions between the Group and its associates are
eliminated in the proportion to the Group's share in such associates, and unrealized losses are excluded in the proportion to the Group's share in such associates, if there is no evidence of
indicators of impairment of an asset transferred.

Goodwill and excess of acquirer's interest in the net fair value of acquiree's identifiable assets, liabilities and contingent liabilities over cost

Goodwill represents the excess of the cost of acquisition over the net fair value of the Group's share of the identifiable assets, liabilities and contingent
liabilities of the acquired subsidiary or associate at the date of acquisition. Goodwill on an acquisition of a subsidiary is included in intangible assets. Goodwill on an acquisition of an associate
is included in the investments in associate. Following initial recognition, goodwill is measured at cost less any accumulated impairment losses.

Goodwill
is not amortized. Instead it is tested for impairment annually or more frequently if events or changes in circumstances indicate that it might be impaired. For the purposes of
impairment testing, goodwill acquired in a business combination is, from the acquisition date allocated to each of the cash-generating units or groups of cash-generating units
expected to benefit from the combination's

F-15

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synergies,
irrespective of whether other assets and liabilities of the Group are assigned to those units or group of units. Each unit or group of units to which goodwill is so allocated:



Impairment
is determined by assessing the recoverable amount of the cash-generating unit, to which the goodwill relates. Where recoverable amount of the
cash-generating unit is less than the carrying amount, an impairment loss is recognized. Where goodwill forms part of a cash-generating unit and part of the operations within
that unit are disposed of, the goodwill associated with the operation disposed of is included in the carrying amount of the operation when determining the gain or loss on disposal of the operation.
Goodwill disposed of in this circumstance is measured based on the relative values of the operation disposed of and the portion of cash-generating unit retained.

In
case of excess of the Group's interest in the net fair value of acquiree's identifiable assets, liabilities and contingent liabilities over cost of business combination
the Group:



Property, plant and equipment

Property, plant and equipment are stated at cost less accumulated depreciation and any impairment in value. The cost of the network comprises all expenditures up
to and including the cabling and wiring to the local telephone operator's intercity exchange, and includes contractors' charges and payments on account, materials, direct labor, and interest costs on
specific project financing up to the date of commissioning of the relevant assets.

Subsequent
expenditures are capitalized if it can be clearly demonstrated that they extend the life of the asset or significantly increase its revenue generating capacity beyond its
originally assessed standard of performance. Expenditure for continuing repairs and maintenance are charged to the statement of income as incurred. Social assets are expensed on acquisition.

Items
of property, plant and equipment that are retired or otherwise disposed of are eliminated from the balance sheet along with the corresponding accumulated depreciation. Any gain or
loss resulting from such retirement or disposal is included in the determination of net income.

F-16

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Depreciation
is calculated on property, plant and equipment on a straight-line basis from the time the assets are available for use, over their estimated useful lives
as follows:

|                                |                                                | Number
of years
|------------------------------- | ---------------------------------------------- | ---------------
|Buildings and site services     |                                                | 1050          
|Cable and transmission devices: |                                                |                
|                                |   Channels                                    |                
|                                |   Cable                                       |                
|                                |   Radio and fixed link transmission equipment |                
|                                |   Telephone exchanges                         |                
|Other                           |                                                | 510           

The useful life of assets encompasses the entire time they are available for use, regardless of whether during that time they are in use or idle.
The useful lives and residual value of assets and methods are reviewed at each financial year-end and, if expectations differ from previous estimates, the changes are accounted for
prospectively (refer to Note 6). Depreciation of an asset ceases at the earlier of the date the asset is classified as held for sale and the date the asset is derecognized.

At
each balance sheet date an assessment is made as to whether there is any indication that the Group's assets may be impaired. If any such indication exists, an assessment is made to
establish whether the recoverable amount of the assets has declined below the carrying amount of those assets as disclosed in the financial statements. When such a decline has occurred, the carrying
amount of the assets is reduced to the recoverable amount. The amount of any such reduction is recognized immediately as a loss in the statement of income. Any subsequent increase in the recoverable
amount of the assets is reversed when the circumstances that led to the write-down or write-off cease to exist and there is persuasive evidence that the new circumstances and
events will persist for the foreseeable future. Increase of the recoverable amount is limited to the lower of its recoverable amount and carrying amount that would have been determined had no
impairment loss been recognized for the asset in prior years.

The
recoverable amount is determined as the higher of the assets' fair value less cost to sell, or value in use. The value in use of the asset is estimated based on forecast of future
cash inflows and outflows to be derived from continued use of the asset and from the estimated net proceeds on disposal, discounted to present value using an appropriate discount rate.

For
the purpose of determining the opening balances on the first application of IFRS at January 1, 1994, the Company performed a valuation of the property, plant and equipment, as
reliable historical cost information and information regarding acquisition dates was not available. These values were used as deemed cost. A brief description of the methodology applied in performing
this valuation is set out below for each major asset category:



F-17

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Construction
in progress represents properties under construction and is stated at cost. This includes cost of construction, plant and equipment and other direct costs. Construction in
progress is not depreciated until the constructed or installed asset is ready for its intended use.

Interest
costs on borrowings to finance the construction of property, plant and equipment are capitalized during the period of time that is required to complete and prepare the asset for
its intended use. All other borrowing costs are expensed.

Leases

The Group has operating and finance leases that are accounted as mentioned below.

Finance
leases, which transfer to the Group substantially all the risks and benefits incidental to ownership of the leased item, are capitalized at the commencement of lease term at the
fair value of the leased property or, if lower, at the present value of the minimum lease payments. Lease payments are apportioned between the finance charges and reduction of the lease liability so
as to achieve a constant rate of interest on the remaining balance of the liability. Finance charges are charged directly against income. Capitalized leased assets are depreciated on a
straight-line basis over the shorter of the estimated useful life of the asset or the lease term unless there is a reasonable certainty that the Group will obtain ownership by the end of
the lease term, in which case the assets are depreciated over their estimated useful lives.

Indefeasible
Rights of Use (IRU) represent the right to use a portion of the capacity of a terrestrial or submarine transmission cable granted for a fixed period. IRUs are recognized as
an asset when the Group has the specific indefeasible right to use an identified portion of the underlying asset, generally optical fibers or dedicated wavelength bandwidth, and the duration of the
right is for the major part of the underlying asset's economic life. Such assets are included in property, plant and equipment in the consolidated balance sheets. They are depreciated over the shorter
of the expected period of use and the life of the contract.

Leases,
including IRU leases, where the lessor retains substantially all the risks and benefits of ownership of the asset are classified as operating leases. Operating lease payments are
recognized as an expense in the income statement on a straight-line basis over the lease term.

Intangible assets

Intangible assets acquired separately are measured on initial recognition at cost. The cost of intangible assets acquired in a business combination is fair value
as at the date of acquisition. Following initial recognition, intangible assets are carried at cost less any accumulated amortization and any accumulated impairment losses. The useful lives of
intangible assets are assessed to be either finite or indefinite.

F-18

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Intangible
assets with finite lives are amortized over the useful economic life and assessed for impairment whether there is an indication that the intangible asset may be impaired.
Amortization periods and methods for intangible assets with finite useful lives are reviewed at least at each financial year-end and, if expectations differ from pervious estimates, the
changes are accounted for as changes in accounting estimates. Changes in the expected useful life or the expected pattern of consumption of future economic benefits embodied in the asset is accounted
for by changing the amortization period or method, as appropriate, and treated as changes in accounting estimates.The amortization expense on intangible assets with finite lives is included in
depreciation and amortization expenses in the consolidated statements of income.

Intangible
assets with indefinite useful lives are not amortised, but tested for impairment annually or more frequently when indicators of impairment exist, either individually or at the
cash-generating unit level. The useful life of an intangible asset with an indefinite life is reviewed annually to determine whether indefinite life assessment continues to be supportable.
If not, the change in the useful life assessment from indefinite to finite is made on a prospective basis.

Inventory

Inventory principally consists of fuel and spare parts for the network. Inventory is stated at the lower of cost incurred in bringing each item to its present
location and its net realizable value. Cost is calculated on a first in first out basis. Items used in the construction of new plant and equipment are capitalized as part of the related asset.
Inventory used in the maintenance of equipment is charged to operating costs as utilized and included in repair and maintenance and other costs in the consolidated statements of income.

Accounts receivable

Trade and other accounts receivable are stated in the balance sheet at original invoice amount less an allowance for any uncollectible amounts. The allowance is
created based on the historical pattern of collections of accounts receivable and specific analysis of recoverability of significant accounts. Bad debts are written off in the period in which they
are identified.

Financial instruments

Financial instruments carried on the balance sheet include cash and cash equivalents, investments (other than in consolidated subsidiaries and equity method
investees), receivables, accounts payable and borrowings. The particular recognition methods adopted for financial instruments are disclosed in the individual policy statements associated with
each item.

Financial
assets are classified into the following categories: loans and receivables, held-to-maturity, at fair value through profit or loss and
available-for-sale. The Group determines the classification of its investments after initial recognition. All purchases and sales are recognized on the settlement date, which
is the date that the investment is delivered to or by the Group.

Loans
and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market, not originated with the intent to be
sold immediately. Such assets

F-19

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are
carried at amortized cost using the effective interest method. Gains and losses are recognized in income when the loans and receivables are derecognized or impaired, as well as through the
amortization process.

Financial
assets at fair value through profit and loss are financial assets which are either classified as held for trading or are designated by the Group as at fair value through profit
or loss upon initial recognition. Financial assets are classified as held for trading if they are acquired for the purposes of selling in the near term. Gains and losses on investments held for
trading are recognized in income.

Non-derivative
financial assets with fixed or determinable payments and fixed maturity that the Group has the positive intent and ability to hold to maturity are classified
as held-to-maturity investments. All other investments not classified in any of the three preceding categories are classified as available-for-sale.
After initial recognition available-for-sale investments are measured at fair value with gains and losses being recognized as a separate component of equity until the
investment is derecognized or until the investment is determined to be impaired, at which time the cumulative gain or loss previously reported in equity is included in the determination of net income.
Interest income from investments is accrued during the period in which it is earned.

The
Group had no securities classified as held-to-maturity or at fair value through profit or loss at December 31, 2006, 2005 and 2004. Loans and
receivables, including bills of exchange, are stated at amortized cost determined on an individual basis.

Derivative financial instruments and hedging

Although it's not its current practice, in rare circumstances the Group can use derivative financial instruments such as interest rate swaps to hedge its risks
associated with interest rate fluctuations. Such derivative financial instruments are initially recognized at fair value on the date on which a derivative contract is entered into and are subsequently
remeasured at fair value. Derivatives are carried as assets when the fair value is positive and as liabilities when the fair value is negative. The fair value of interest rate swap contracts is
determined by reference to the market values for similar instruments.

Any
gains or losses arising from changes in fair value of derivatives that do not qualify for hedge accounting are taken directly to net profit or loss for the year.

For
the years ended December 31, 2006, 2005 and 2004 the Group did not have any derivatives designated as hedging instruments. Therefore, the gain or loss on a derivative
instruments held by the Group was recognized currently in income. The net loss of 15 related to the change in the fair value of the interest rate swap contract (refer to Notes 15 and 18)
was included in the non-operating income in the consolidated statement of income for the year ended December 31, 2006.

Borrowings

Borrowings are initially recognized at cost, being the fair value of the consideration received, net of transaction costs incurred. In subsequent periods,
borrowings are measured at amortized cost using the effective interest rate method; any difference between the fair value of the consideration received

F-20

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(net
of transaction costs) and the redemption amount is recognized as interest expense over the period of the borrowings.

Cash and cash equivalents

Cash and cash equivalents consist of cash on hand, balances with banks, and highly liquid investments with original maturities of three months or less, with
insignificant risks of diminution in value.

Deferred income taxes

Deferred income tax is provided, using the liability method, on all temporary differences at the balance sheet date between the tax basis of assets and
liabilities and their carrying amounts for financial reporting purposes.

Deferred
income tax liabilities are recognized for all taxable temporary differences:



Deferred
income tax assets are recognized for all deductible temporary differences, carry-forward of unused tax credits and unused tax losses, to the extent that it is probable that
taxable profit will be available against which the deductible temporary differences, carry-forward of unused tax credits and unused tax losses can be utilized:



The
carrying amount of deferred income tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profit will be
available to allow all or part of the deferred income tax asset to be utilized. Any such previously recognized reduction is reversed to the extent that it becomes probable that sufficient taxable
profit will be available.

F-21

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Deferred
tax assets and liabilities are measured at the tax rates that are expected to apply to the period when the asset will be realized or the liability settled. Tax rates are based
on laws that have been enacted or substantively enacted at the balance sheet date.

Revenue and operating costs recognition

Revenue and operating costs for all services supplied and received are recognized at the time the services are rendered. Revenue is recognized when it is probable
that the economic benefits associated with the transaction will flow to the enterprise and the amount of revenue can be reliably measured. Revenues and expenses are reported net of respective value
added tax.

Prior
to 2006, the Group charged and paid to regional local telephone operators and other telecommunications service providers in Russia either an agreed proportion of the amounts they
billed to their subscribers or an agreed settlement rate based on traffic minutes. For outgoing telephone traffic originating in Moscow, subscribers were charged directly by the Group based on
pre-set per minute tariffs regulated by the Ministry of Telecommunications.

As
referred to in Note 3 above, effective January 1, 2006, as a result of regulatory reform in the telecommunications industry, new regulations and rules were put in force
that changed principles of interaction between the Group, local operators and end users in providing long-distance services. The introduction of the new settlement system represents a
change in business practice resulting in new accounting for changed practice. Therefore, starting from January 1, 2006, the Group charges all its subscribers throughout Russia for outgoing
telephone traffic based on pre-set per minute tariffs regulated by the Ministry of Telecommunications. The Group is charged by regional local operators for originating and terminating
calls. The Group also incurs agent fees in connection with the service contracts concluded with regional local operators.

The
Group charges amounts to foreign network operators for incoming calls and other traffic that originate outside Russia. The Group is charged by foreign operators for completing
international calls. These revenues and costs are shown gross in the consolidated financial statements.

Amounts
payable to and receivable from the same operators are shown net in the balance sheet where a legal right of offset exists and there is intention either to settle on a net basis,
or to realize the asset and settle the liability simultaneously.

Revenues
from the sale of transmission capacity on terrestrial and submarine cables, which relates to IRU under operating leases where the Group is a lessor, are recognized on a
straight-line basis over the life of the contract.

Employee benefits

The Group operates a defined benefit pension scheme which requires one-off contributions, representing net present value of future monthly payments to
employees, to be made by the Group to a separately administered pension fund upon employees' dismissal. A participating employee with fifteen or more years of service in telecommunications industry is
eligible for the pension provided dismissal is accepted within one month after the statutory retirement age. The pension fund is liable for payments

F-22

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to
the retired employees. Under the scheme benefits payable are indexed periodically. Actuarial gains and losses are recognized in the statement of income immediately.

The
Group also participates in a defined contribution plan. Contributions made by the Group on defined contribution plans are charged to expenses when incurred. Effective
January 1, 2004, maximum contribution is established at 100 Rubles per month per employee.

The
Group accrues for the employees' compensated absences (vacations) as the additional amount that the Group expects to pay as a result of the unused vacation that has accumulated at
the balance sheet date.

Under
provision of the Russian legislation, social contributions are made through a unified social tax ("UST") calculated by the Group by the application of a regressive rate (from 26%
to 2%) to the annual gross remuneration of each employee. The Group allocates the UST to three social funds (state pension fund, social and medical insurance funds), where the rate of contributions to
the pension fund varies from 20% to 2% depending on the annual gross salary of each employee. The Group's contributions relating to UST are expensed in the year to which they relate.

Advertising costs

Advertising costs are charged to the statement of income as incurred.

Borrowing costs

Borrowing costs are expensed, except for those that would have been avoided if the expenditure to acquire the qualifying asset had not been made. To the extent
that funds are borrowed generally and used for the purpose of obtaining a qualifying asset, the amount of borrowing costs eligible for capitalization is determined by applying a capitalization rate to
the expenditures on that asset. The capitalization rate is the weighted average rate of the borrowing costs applicable to the borrowings of the enterprise that are outstanding during the period, other
than borrowings made specifically for the purpose of obtaining the qualifying asset. Qualifying borrowing costs are capitalized with the relevant qualifying asset from the date the activities to
prepare the asset are in progress and expenditures and borrowing costs are being incurred until the related asset is substantially ready for its intended use. Capitalized borrowing costs are
subsequently charged to the statement of income in the period over which the asset is depreciated.

Foreign currency transactions

Transactions denominated in foreign currencies are translated into Rubles at the exchange rate as of the transaction date. Foreign currency monetary assets and
liabilities are translated into Rubles at the exchange rate as of the balance sheet date. Exchange differences arising on the settlement of monetary items, or on reporting the Group's monetary items
at rates different from those at which they were initially recorded in the period, or reported in previous financial statements, are recorded as foreign currency exchange gains or losses in the period
in which they arise.

F-23

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As
at December 31, 2006, 2005 and 2004, the rates of exchange used for translating foreign currency balances were (in Russian Rubles for one unit of foreign currency):

|                             |  | 2006   |  | 2005   |  | 2004  
|---------------------------- |  | ------ |  | ------ |  | ------
|US Dollars                   |  | 26.33  |  | 28.78  |  | 27.75 
|Japanese Yen                 |  | 0.2216 |  | 0.2453 |  | 0.2675
|Special Drawing Rights (SDR) |  | 39.58  |  | 41.13  |  | 42.98 
|EURO                         |  | 34.70  |  | 34.18  |  | 37.81 

---

Source: the Central Bank

Dividends

Dividends are recognized when the shareholder's right to receive the payment is established. Dividends in respect of the period covered by the financial
statements that are proposed or declared after the balance sheet date but before approval of the financial statements are not recognized as a liability at the balance sheet date in accordance with IAS
No. 10, "Events After the Balance Sheet Date". The amount of dividends declared after the balance sheet date but before the financial statements were authorized for issue is disclosed in
Note 32.

Minority interest

Minority interest includes that part of the net results of operations and of net assets of subsidiaries attributable to interests which are not owned, directly or
indirectly through subsidiaries, by the Company. Minority interest at the balance sheet date represents the minority shareholders' portion of the fair values of identifiable assets and liabilities of
the subsidiary at the acquisition date, and the minority's portion of movements in net assets since the date of the combination. The losses applicable to the minority interest holder in a consolidated
subsidiary may exceed the minority interest in the equity of the subsidiary.

The
excess, and any further losses applicable to the minority, are charged against the majority interest, except to the extent that the minority has a binding obligation to, and is able
to, make good for the losses. If the subsidiary subsequently reports profits, the majority interest holder is allocated all such profits until the minority's interest holder share of losses previously
absorbed by the majority has been recovered. If a subsidiary or an associate has outstanding cumulative preferred shares which are held outside the Group, the Company computes its share of profits or
losses after adjusting for the preferred dividends, whether or not the dividends have been declared.

Minority
interest in the acquiree is stated at the minority's interest holder proportion of the net fair values of the acquiree's identifiable assets, liabilities and contingent
liabilities recognized as part of allocating the cost of the combination at the acquisition date.

F-24

---



Earnings per share

IAS No. 33, as revised, requires the application of the "two-class method" to determine earnings applicable to ordinary shareholders, the
amount of which is used as a nominator to calculate earnings per ordinary share. The application of the "two-class method" requires that the profit or loss after deducting preferred
dividends is allocated to ordinary shares and other participating equity instruments to the extent that each instrument shares in earnings as if all of the profit or loss for the period had been
distributed. The total profit or loss allocated to each class of equity instrument is determined by adding together the amount allocated for dividends and the amount allocated for a participation
feature.

Segment information

Effective December 1, 2003, the Group operates only in one segment being provision of telecommunications services.

Operating
segments were identified based on the organizational structure of the Group and types of activities the Company and its subsidiaries are engaged in.

Reclassifications

The classification of revenue was amended in the consolidated statement of income for the year ended December 31, 2006. The change in the classification of
revenue is due to introduction of the new regulations in telecommunications industry (refer to Note 3). Comparative amounts for the years ended December 31, 2005 and 2004 were
reclassified to conform to current year presentation.

The
classification of revenue as it was presented in previously reported consolidated statements of income for the years ended December 31, 2005 and 2004 and as it is presented in
the consolidated statements of income for the same periods are shown below.

As previously reported

|                  |  | 2005   |  | 2004  
|----------------- |  | ------ |  | ------
|Local operators   |  | 25,227 |  | 22,648
|Subscribers       |  | 8,955  |  | 8,740 
|Foreign operators |  | 4,706  |  | 4,560 
|Other             |  | 2,067  |  | 1,370 
|                  |  |        |  |       
|Total revenue     |  | 40,955 |  | 37,318
|                  |  |        |  |       

F-25

---



As currently reported

|                  |  | 2005   |  | 2004  
|----------------- |  | ------ |  | ------
|Telephone traffic |  | 31,629 |  | 30,398
|Rent of channels  |  | 6,045  |  | 4,623 
|Other revenue     |  | 3,281  |  | 2,297 
|                  |  |        |  |       
|Total revenue     |  | 40,955 |  | 37,318
|                  |  |        |  |       

IFRSs and IFRIC Interpretations not yet effective

The Group has not applied the following IFRSs and IFRIC Interpretations that have been issued but are not yet effective:



IFRS 7
"Financial Instruments: Disclosures" replaces the disclosure requirements of IAS 32 and must be applied for annual reporting periods that commence on or after
January 1, 2007.

The
amendment of IAS 1 "Presentation of Financial StatementsCapital Disclosures" requires disclosures regarding an entity's objectives, policies and processes for
managing capital. The provisions are effective for reporting periods beginning on or after January 1, 2007.

IFRIC 8
clarifies that IFRS 2 applies to arrangements where an entity makes share-based payments for apparently nil or inadequate consideration. If the identifiable
consideration given appears to be less than the fair value of the equity instrument granted, under IFRIC 8 this situation typically indicates that other consideration has been or will be
received. IFRS 2 therefore applies. IFRIC 8 becomes effective for financial years beginning on or after May 1, 2006.

IFRIC 9
clarifies, that an entity shall assess whether an embedded derivative is required to be separated from the host contract and accounted for as a derivative when the entity
first becomes a party to the contract. Subsequent reassessment is prohibited unless there is a change in the terms of the contract that significantly modifies the cash flows that otherwise would be
required under the contract, in which case reassessment is required. An entity shall apply this interpretation for annual periods beginning on or after June 1, 2006.

F-26

---





Applying
IFRIC 10, an entity shall not reverse an impairment loss recognized in a previous interim period in respect of goodwill or an investment in either an equity instrument or
a financial asset carried at cost. An entity shall apply this interpretation for annual periods beginning on or after November 1, 2006.

IFRIC 11
addresses the issues whether the certain transactions should be accounted for as equity-settled or as cash-settled under the requirements of IFRS 2,
and concerns the accounting treatment for share-based payment arrangements that involve two or more entities within the same group. An entity shall apply this interpretation for annual periods
beginning on or after March 1, 2007.

The
Group expects that the adoption of the pronouncements listed above will have no significant impact on the Group's result of operation and financial positions in the period of initial
application. The adoption of IFRS 7 will significantly affect the disclosures relating to financial instruments as presented in the notes to the financial statements.

5.     BUSINESS COMBINATIONS

Globus-Telecom

On April 3, 2006 the Group in a linked transaction acquired 94.9% shares of ZAO Globus-Telecom, of which 60% was acquired from ZAO Alsean-N for
666, 15% was acquired from OAO
RTC-Leasing for 155 and 20% was acquired through purchase of 100% share in OOO Telecomcenter for 281. Costs directly attributable to the business combination amounted to 21 and consist of
payments for legal and consulting services. The main activity of Globus-Telecom is provision of telecommunications services, including provision of local telecommunications services, data transmission
services, rent of channels, to governmental, corporate and individual customers in Moscow and other regions throughout Russia. The purchase of Globus-Telecom was aimed to strengthen competitive
position of the Group in the retail market by increasing its share at Moscow corporate market and expanding the range of services provided to end-customers.

The
Group accounted for acquisition of Globus-Telecom applying the purchase method, in accordance with provisions of IFRS 3, "Business combinations". Accordingly, the results of
operations and financial position of Globus-Telecom were consolidated by the Group beginning from April 3, 2006.

F-27

---



The
following table summarizes the fair values of identifiable net assets of Globus-Telecom acquired as at the acquisition date:

|                                              |                                  | April 3, 2006 |    
|--------------------------------------------- | -------------------------------- | ------------- | ---
|Property, plant and equipment                 |                                  | 171           |    
|Intangible assets                             |                                  |               |    
|                                              | Number capacity                  |               | 326
|                                              | Contract-based intangible assets |               | 147
|                                              | Computer software                |               | 27 
|Inventories                                   |                                  | 2             |    
|Trade and other accounts receivable           |                                  | 88            |    
|Cash                                          |                                  | 12            |    
|Other current assets                          |                                  | 53            |    
|Deferred tax liability                        |                                  | (98           | )  
|Long-term accounts payable                    |                                  | (49           | )  
|Short-term debt                               |                                  | (51           | )  
|Accounts payable and accrued liabilities      |                                  | (167          | )  
|Other current liabilities                     |                                  | (17           | )  
|                                              |                                  |               |    
|Fair value of net assets                      |                                  | 444           |    
|Less: minority interest (5.1%)                |                                  | (23           | )  
|                                              |                                  |               |    
|Group's share of the fair value of net assets |                                  | 421           |    
|Consideration paid                            |                                  | 1,123         |    
|                                              |                                  |               |    
|Goodwill                                      |                                  | 702           |    
|                                              |                                  |               |    

The disclosure of carrying amounts of assets, liabilities and contingent liabilities of Globus-Telecom in accordance with IFRS, immediately before
the business combination, is impracticable as Globus-Telecom had not been an IFRS reporter.

From
the date of acquisition, Globus-Telecom has contributed 6 to the increase of the net profit of the Group for 2006. If the combination had taken place at the beginning of the year,
the profit of the Group would have been 1,447 and revenue would have been 61,652.

Zebra Telecom

On June 13, 2006, the Group acquired 100% shares of ZAO Zebra Telecom from Starford Investments Company Ltd. for 374 in cash. The main activity of
Zebra Telecom is provision of local telecommunications services and Internet services mostly in Moscow to individual customers. The purchase of Zebra Telecom was aimed to increase diversification of
activities of the Group and to develop the activities related to sale of prepaid telephone cards.

The
acquisition of Zebra Telecom was accounted for using the purchase method, in accordance with provisions of IFRS 3, "Business combinations". Accordingly, the results of
operations and financial

F-28

---



position
of Zebra Telecom were consolidated by the Group beginning from June 13, 2006. The following table summarizes on a provisional basis the fair values of net assets acquired as at the
acquisition date:

|                                         |                                  | June 13, 2006 |    
|---------------------------------------- | -------------------------------- | ------------- | ---
|Property, plant and equipment            |                                  | 42            |    
|Intangible assets                        |                                  |               |    
|                                         | Trademarks                       |               | 197
|                                         | Contract-based intangible assets |               | 3  
|                                         | Number capacity                  |               | 1  
|                                         | Computer software                |               | 4  
|Inventories                              |                                  | 10            |    
|Trade and other accounts receivable      |                                  | 35            |    
|Cash                                     |                                  | 1             |    
|Other current assets                     |                                  | 17            |    
|Deferred tax liability                   |                                  | (29           | )  
|Short-term debt                          |                                  | (49           | )  
|Accounts payable and accrued liabilities |                                  | (95           | )  
|                                         |                                  |               |    
|Fair value of net assets                 |                                  | 137           |    
|Consideration paid                       |                                  | 374           |    
|                                         |                                  |               |    
|Goodwill                                 |                                  | 237           |    
|                                         |                                  |               |    

The disclosure of carrying amounts of assets, liabilities and contingent liabilities of Zebra Telecom in accordance with IFRS, immediately before
the business combination, is impracticable as Zebra Telecom had not been an IFRS reporter.

From
the date of acquisition Zebra Telecom has contributed 13 to the decrease of the net profit of the Group for 2006. If the combinations had taken place at the beginning of the year,
the profit of the Group would have been 1,417 and revenue would have been 61,741.

GlobalTel

The Group owns 51% of the ordinary shares of GlobalTel, a Russian closed joint stock company since inception of GlobalTel. GlobalTel was created in 1996 to
provide access to a US-based global mobile satellite telephone network. Since the time of its launch, the global satellite network has experienced technical problems and low subscriber
interest, as the result of which GlobalTel has only recently developed its operations beyond the development stage. The US owner of the satellite network also owns the remaining 49 per cent of
GlobalTel. The charter of GlobalTel, its by-laws and the way GlobalTel historically conducted its operations provided for substantive participation of both shareholders in the economic
activities of GlobalTel. The minority shareholder had effective veto rights that would prevent the Group from causing GlobalTel to take an action that is significant in the ordinary course of its
business. Because effective control of GlobalTel did not rest with the Group,

F-29

---



management
accounted for the investment in GlobalTel under the equity method. The Group did not recognize its share in losses of GlobalTel as the accumulated share in losses of GlobalTel exceeded the
investment of the Group in GlobalTel. Loans and other accounts receivable from GlobalTel were fully provided for as a loss from GlobalTel. Any receipts from GlobalTel in respect of the loans and
receivable were recognized as gain from associates in the period they were received.

On
April 25, 2005 the shareholders' meeting of GlobalTel approved a new charter which abolished the other shareholder's veto and substantive participation rights. The Group
assessed that these changes resulted in it obtaining control over GlobalTel, thus, converting it from jointly controlled entity to a subsidiary of the Group. Consequently, the results of operations
and financial position of GlobalTel were consolidated in the financial statements of the Group in accordance with IAS No. 27, "Consolidated Financial Statements and Accounting for Investments
in Subsidiaries", prospectively beginning from April 25, 2005.

The
obtaining control over GlobalTel was accounted for using the purchase method, in accordance with provisions of IFRS 3, "Business combinations". Accordingly, the results of
operations and financial position of GlobalTel were consolidated by the Group beginning from April 25, 2005. The following table summarizes the fair values of net assets acquired at the date of
obtaining control:

|                                          |  | April 25, 2005 |  
|----------------------------------------- |  | -------------- | -
|Property, plant and equipment             |  | 357            |  
|Inventories                               |  | 191            |  
|Trade and other accounts receivable       |  | 37             |  
|Other current assets                      |  | 161            |  
|Cash                                      |  | 138            |  
|Short-term debt (Loral)                   |  | (219           | )
|Vendor financing (Globalstar)             |  | (1,206         | )
|Lease liabilities                         |  | (86            | )
|Other current liabilities                 |  | (199           | )
|Fair value of net assets acquired         |  | (826           | )
|Share in accumulated deficit of GlobalTel |  | 826            |  
|                                          |  |                |  
|Total investment                          |  |               |  
|                                          |  |                |  

In accordance with Russian legislation, joint stock companies must maintain a level of equity (net assets) that is greater than the charter
capital. In the event that a company's net assets, as determined under Russian accounting legislation, fall below certain minimum levels, specifically below zero, the company can be forced to
liquidate. Zebra Telecom and GlobalTel have had, and continue to have, negative equity as reported in their Russian statutory financial statements. Management believes that the risk of the initiation
of statutory liquidation procedures or other material adverse actions is remote.

F-30

---



6.     PROPERTY, PLANT AND EQUIPMENT

The net book value of property, plant and equipment as of December 31, 2006, 2005 and 2004 was as follows:

|                                        |  | Buildings and site services |   | Cable and transmission devices |   | Other   |   | Construction in progress |   | Total    |  
|--------------------------------------- |  | --------------------------- | - | ------------------------------ | - | ------- | - | ------------------------ | - | -------- | -
|Cost                                    |  |                             |   |                                |   |         |   |                          |   |          |  
|At January 1, 2006                      |  | 25,632                      |   | 111,551                        |   | 24,190  |   | 6,789                    |   | 168,162  |  
|Additions                               |  |                            |   |                               |   |        |   | 7,706                    |   | 7,706    |  
|Additions with acquired subsidiaries    |  |                            |   | 157                            |   | 31      |   | 25                       |   | 213      |  
|Disposals                               |  | (1,991                      | ) | (13,171                        | ) | (1,787  | ) | (48                      | ) | (16,997  | )
|Transfer                                |  | 208                         |   | 3,379                          |   | 2,592   |   | (6,179                   | ) |         |  
|                                        |  |                             |   |                                |   |         |   |                          |   |          |  
|At December 31, 2006                    |  | 23,849                      |   | 101,916                        |   | 25,026  |   | 8,293                    |   | 159,084  |  
|                                        |  |                             |   |                                |   |         |   |                          |   |          |  
|Accumulated Depreciation and Impairment |  |                             |   |                                |   |         |   |                          |   |          |  
|At January 1, 2006                      |  | (17,938                     | ) | (92,394                        | ) | (17,066 | ) | (136                     | ) | (127,534 | )
|Depreciation expense                    |  | (1,805                      | ) | (4,674                         | ) | (1,919  | ) |                         |   | (8,398   | )
|Disposals                               |  | 1,456                       |   | 12,926                         |   | 1,652   |   |                         |   | 16,034   |  
|                                        |  |                             |   |                                |   |         |   |                          |   |          |  
|At December 31, 2006                    |  | (18,287                     | ) | (84,142                        | ) | (17,333 | ) | (136                     | ) | (119,898 | )
|                                        |  |                             |   |                                |   |         |   |                          |   |          |  
|Net book value at December 31, 2006     |  | 5,562                       |   | 17,774                         |   | 7,693   |   | 8,157                    |   | 39,186   |  
|                                        |  |                             |   |                                |   |         |   |                          |   |          |  

|                                        |  | Buildings and site services |   | Cable and transmission devices |   | Other   |   | Construction in progress |   | Total    |  
|--------------------------------------- |  | --------------------------- | - | ------------------------------ | - | ------- | - | ------------------------ | - | -------- | -
|Cost                                    |  |                             |   |                                |   |         |   |                          |   |          |  
|At January 1, 2005                      |  | 22,507                      |   | 123,287                        |   | 24,470  |   | 4,313                    |   | 174,577  |  
|Additions                               |  |                            |   |                               |   |        |   | 7,944                    |   | 7,944    |  
|Additions with acquired subsidiaries    |  |                            |   | 328                            |   | 28      |   | 79                       |   | 435      |  
|Disposals                               |  | (1,055                      | ) | (11,527                        | ) | (2,204  | ) | (8                       | ) | (14,794  | )
|Transfer                                |  | 228                         |   | 1,886                          |   | 3,425   |   | (5,539                   | ) |         |  
|Reclassification                        |  | 3,952                       |   | (2,423                         | ) | (1,529  | ) |                         |   |         |  
|                                        |  |                             |   |                                |   |         |   |                          |   |          |  
|At December 31, 2005                    |  | 25,632                      |   | 111,551                        |   | 24,190  |   | 6,789                    |   | 168,162  |  
|                                        |  |                             |   |                                |   |         |   |                          |   |          |  
|Accumulated Depreciation and Impairment |  |                             |   |                                |   |         |   |                          |   |          |  
|At January 1, 2005                      |  | (15,242                     | ) | (95,634                        | ) | (17,714 | ) |                         |   | (128,590 | )
|Depreciation expense                    |  | (757                        | ) | (4,761                         | ) | (1,618  | ) |                         |   | (7,136   | )
|Impairment                              |  | (1,112                      | ) | (2,687                         | ) | (1,026  | ) | (136                     | ) | (4,961   | )
|Disposals                               |  | 679                         |   | 10,460                         |   | 2,014   |   |                         |   | 13,153   |  
|Reclassification                        |  | (1,506                      | ) | 228                            |   | 1,278   |   |                          |   |         |  
|                                        |  |                             |   |                                |   |         |   |                          |   |          |  
|At December 31, 2005                    |  | (17,938                     | ) | (92,394                        | ) | (17,066 | ) | (136                     | ) | (127,534 | )
|                                        |  |                             |   |                                |   |         |   |                          |   |          |  
|Net book value at December 31, 2005     |  | 7,694                       |   | 19,157                         |   | 7,124   |   | 6,653                    |   | 40,628   |  
|                                        |  |                             |   |                                |   |         |   |                          |   |          |  

F-31

---



|                                    |  | Buildings and site services |   | Cable and transmission devices |   | Other   |   | Construction in progress |   | Total    |  
|----------------------------------- |  | --------------------------- | - | ------------------------------ | - | ------- | - | ------------------------ | - | -------- | -
|Cost                                |  |                             |   |                                |   |         |   |                          |   |          |  
|At January 1, 2004                  |  | 23,386                      |   | 122,290                        |   | 23,266  |   | 5,345                    |   | 174,287  |  
|Additions                           |  |                            |   |                               |   |        |   | 4,773                    |   | 4,773    |  
|Disposals                           |  | (950                        | ) | (2,068                         | ) | (958    | ) | (14                      | ) | (3,990   | )
|Disposal of subsidiaries            |  |                            |   | (241                           | ) | (131    | ) | (121                     | ) | (493     | )
|Transfer                            |  | 71                          |   | 3,306                          |   | 2,293   |   | (5,670                   | ) |         |  
|                                    |  |                             |   |                                |   |         |   |                          |   |          |  
|At December 31, 2004                |  | 22,507                      |   | 123,287                        |   | 24,470  |   | 4,313                    |   | 174,577  |  
|                                    |  |                             |   |                                |   |         |   |                          |   |          |  
|Accumulated Depreciation            |  |                             |   |                                |   |         |   |                          |   |          |  
|At January 1, 2004                  |  | (15,471                     | ) | (92,756                        | ) | (16,475 | ) |                         |   | (124,702 | )
|Depreciation expense                |  | (544                        | ) | (4,901                         | ) | (2,053  | ) |                         |   | (7,498   | )
|Disposals                           |  | 773                         |   | 1,957                          |   | 754     |   |                         |   | 3,484    |  
|Disposal of subsidiaries            |  |                            |   | 66                             |   | 60      |   |                         |   | 126      |  
|                                    |  |                             |   |                                |   |         |   |                          |   |          |  
|At December 31, 2004                |  | (15,242                     | ) | (95,634                        | ) | (17,714 | ) |                         |   | (128,590 | )
|                                    |  |                             |   |                                |   |         |   |                          |   |          |  
|Net book value at December 31, 2004 |  | 7,265                       |   | 27,653                         |   | 6,756   |   | 4,313                    |   | 45,987   |  
|                                    |  |                             |   |                                |   |         |   |                          |   |          |  

Changes in estimate of useful lives

In March 2006 the Company formalized a plan to gradually discontinue using analog trunk lines and equipment beginning from January 2006 through the end of 2010.
The Company has accordingly revised its estimate of the remaining period of use of the analog lines and equipment prospectively effective January 1, 2006. The net effect of change in useful
lives of analog trunk lines for the year ended December 31, 2006, was to increase depreciation by 1,393. The change in useful lives is expected to result in increase of depreciation for the
years ended December 31, 2007 and 2008 by 163 and 113, respectively. Management believes these differences will be decreasing in later years.

At
December 31, 2006 the gross carrying value of fully depreciated property, plant and equipment was 68,212 (2005: 51,777).

Leased assets

Leased assets as of December 31, 2006 and 2005, where the Group is a lessee of IRU, plants and machinery under finance lease agreements, comprised of
the following:

|                                             |  | 2006 |   | 2005 |   | 2004
|-------------------------------------------- |  | ---- | - | ---- | - | ----
|Costcapitalized finance leases              |  | 505  |   | 412  |   |    
|Impairment loss and accumulated depreciation |  | (101 | ) | (51  | ) |    
|                                             |  |      |   |      |   |     
|Net book value                               |  | 404  |   | 361  |   |    
|                                             |  |      |   |      |   |     

Refer to Note 16 for further details regarding finance leases.

F-32

---



Site restoration provision

In connection with the above plan to discontinue using analog trunk lines and equipment the Group recognized a site restoration obligation of 104 and 25 in the
consolidated balance sheets as of
December 31, 2006 and 2005, respectively (refer to Note 15). The costs the Group expects to incur in connection with abandonment and land restoration are included in additions to Cable
and transmission devices in the amount of 129 and 25 for the year ended December 31, 2006 and 2005, respectively.

Interest capitalization

Interest amounting to 273, 118 and 161 was capitalized in property, plant and equipment for the years ended December 31, 2006, 2005 and 2004. The
capitalization rate used to determine the amount of borrowing costs eligible for capitalization is 7.8%, 5.4% and 6.1%, respectively.

Pledged property, plant and equipment

Property, plant and equipment with a carrying value of 3,240, 3,837, and 2,066 was pledged in relation to loan agreements entered into by the Group as of
December 31, 2006, 2005 and 2004, respectively (refer to Notes 18 and 19). Included in pledged property, plant and equipment as of December 31, 2006 and 2005 is also the
Satellite Gateway equipment with a carrying value of 154 and 206, respectively, pledged in connection with vendor financing received from Globalstar L.P. (minority shareholder of GlobalTel).
Currently, GlobalTel is in default on this vendor financing (see also Note 17).

Impairment of property, plant and equipment

As discussed in detail in Note 3, as part of the regulatory reform and restructuring of the national telecommunications sector aimed to facilitate
competition and make the industry more attractive for investors, in 2005 the Ministry of Telecommunications issued a number of new rules and regulations that resulted in change of the Group's status
as a monopoly supplier of long distance and international communications effective January 1, 2006.

As
of December 31, 2005 the Group performed the assessment of the impact of the new rules and regulations on its business and results of operations that resulted in a 4,970
impairment loss recognized in the statement of income for the year ended December 31, 2005 related to write-down of certain property, plant and equipment of 4,961 and goodwill of 9
to their recoverable amount. The recoverable amount of property, plant and equipment was based on value in use and was determined at the cash-generating unit level. The
cash-generating unit consisted of the Company and its subsidiaries: Westelcom and MTs NTT. Impairment analysis was performed based on the value in use as fair value less cost to sell
cannot be determined reliably. In determining value in use for the cash-generating unit, the cash flows were discounted at a rate of 16.65% on a pre-tax basis and cash flows
beyond the 5-year period were extrapolated using a 5% growth rate.

F-33

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7.     GOODWILL AND OTHER INTANGIBLE ASSETS

The net book value of other intangible assets as of December 31, 2006 and 2005 was as follows:

|                                        |  | Goodwill |   | Number capacity |  | Trademarks |  | Computer software |   | Other |   | Total |  
|--------------------------------------- |  | -------- | - | --------------- |  | ---------- |  | ----------------- | - | ----- | - | ----- | -
|Cost                                    |  |          |   |                 |  |            |  |                   |   |       |   |       |  
|At January 1, 2006                      |  | 9        |   |                |  |           |  |                  |   |      |   | 9     |  
|Additions                               |  |         |   | 26              |  |           |  | 1,145             |   |      |   | 1,171 |  
|Additions with acquired subsidiaries    |  | 939      |   | 327             |  | 197        |  | 31                |   | 150   |   | 1,644 |  
|                                        |  |          |   |                 |  |            |  |                   |   |       |   |       |  
|At December 31, 2006                    |  | 948      |   | 353             |  | 197        |  | 1,176             |   | 150   |   | 2,824 |  
|                                        |  |          |   |                 |  |            |  |                   |   |       |   |       |  
|Accumulated Amortization and Impairment |  |          |   |                 |  |            |  |                   |   |       |   |       |  
|At January 1, 2006                      |  | (9       | ) |                |  |           |  |                  |   |      |   | (9    | )
|Amortization expense                    |  |         |   |                |  |           |  | (13               | ) | (7    | ) | (20   | )
|                                        |  |          |   |                 |  |            |  |                   |   |       |   |       |  
|At December 31, 2006                    |  | (9       | ) |                |  |           |  | (13               | ) | (7    | ) | (29   | )
|                                        |  |          |   |                 |  |            |  |                   |   |       |   |       |  
|Net book value at December 31, 2006     |  | 939      |   | 353             |  | 197        |  | 1,163             |   | 143   |   | 2,795 |  
|                                        |  |          |   |                 |  |            |  |                   |   |       |   |       |  

The intangible assets recognized separately as a result of acquisition of Globus-Telecom and Zebra Telecom (refer to Note 5) represent
resources from which future economic benefits are expected to flow to the Group, and include the following classes:



The
owned number capacity and trademarks are intangible assets with indefinite useful lives and are not amortized. These assets are tested for impairment annually or more frequently if
there is an indication that the intangible assets may be impaired.

The
computer software includes internally generated and acquired intangible assets and has estimated useful lives from 1 to 10 years.

The
goodwill recognized above is attributed to the expected synergies and other benefits from combining the assets and activities of Globus-Telecom and Zebra Telecom with those of the
Group (refer to Note 5). Both subsidiaries, Globus-Telecom and Zebra Telecom, are identified as separate cash-generating units. Goodwill and indefinite life intangible assets
acquired through business combination with Globus-Telecom and Zebra Telecom are allocated to these individual cash-generating units, respectively. Subsequently, both
cash-generating units (net assets of which include goodwill acquired) are tested for impairment annually. In case of impairment of the unit the loss will be allocated to goodwill firstly
and to the other assets pro rata on the basis of the carrying amount of each asset in the unit.

F-34

---



Globus-Telecom

The recoverable amount of Globus-Telecom unit has been determined based on a value in use calculation using cash flow projections based on financial budgets
approved by senior management covering a 3-years period. The discount rate applied to the cash flow projections is 10.6% and cash flows beyond this period are extrapolated using nil
growth rate.

Zebra Telecom

The recoverable amount of Zebra Telecom unit has been determined based on a value in use calculation using cash flow projections based on financial budgets
approved by senior management covering a 5-years period. The discount rate applied to the cash flow projections is 14.7% and cash flows beyond this period are extrapolated using nil
growth rate.

As
of December 31, 2006, the carrying amounts of Globus-Telecom and Zebra Telecom units were less than their recoverable amounts, thus no impairment loss was recognized in the
consolidated statement of income for the year ended December 31, 2006.

Carrying
amount of goodwill, number capacity and trademarks as of December 31, 2006 allocated to each of the cash-generating units is as follows:

|                                    |  | Globus- Telecom |  | Zebra Telecom |  | Total
|----------------------------------- |  | --------------- |  | ------------- |  | -----
|Goodwill                            |  | 702             |  | 237           |  | 939  
|Number capacity                     |  | 352             |  | 1             |  | 353  
|Trademarks                          |  |                |  | 197           |  | 197  
|                                    |  |                 |  |               |  |      
|Net book value at December 31, 2006 |  | 1,054           |  | 435           |  | 1,489
|                                    |  |                 |  |               |  |      

Interest amounting to 76 was capitalized primarily in computer software, for the year ended December 31, 2006.

F-35

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8.     SUBSIDIARIES

These consolidated financial statements include the assets, liabilities and results of operations of OAO "Rostelecom" and the following of its
subsidiaries, all registered in the Russian Federation:

|                                                   |  |                                                         |  | Effective share of the Group as of December 31,
|-------------------------------------------------- |  | ------------------------------------------------------- |  | -----------------------------------------------
|
|
|ZAO MTs NTT ("MTs NTT")                            |  | Fixed line telecommunications services                  |  | 100%                                           
|ZAO Westelcom ("Westelcom")                        |  | Leasing of telecommunications equipment                 |  | 100%                                           
|ZAO Zebra Telecom ("Zebra Telecom") (see Note 5)   |  | Local telecommunications services and Internet services |  | 100%                                           
|ZAO Globus-Telecom ("Globus-Telecom") (see Note 5) |  | Local telecommunications services                       |  | 94.9%                                          
|ZAO GlobalTel ("GlobalTel") (see Note 5)           |  | Satellite telecommunications                            |  | 51%                                            
|ZAO SK Kostars ("Kostars")                         |  | Insurance services                                      |  | 86.7%                                          
|ZAO Incom ("Incom")                                |  | Local telecommunications services                       |  | 54.4%                                          
|DP Pansionat "Malakhit"                            |  | Recreation services                                     |  | 100%                                           

9.     INVESTMENTS IN ASSOCIATES

Movements in investments in associates and joint ventures during the years ended December 31, 2006, 2005 and 2004 were as follows:

|                                                                         |  | 2006 |   | 2005   |   | 2004  |  
|------------------------------------------------------------------------ |  | ---- | - | ------ | - | ----- | -
|Beginning of year                                                        |  | 331  |   | 2,511  |   | 2,381 |  
|Additions                                                                |  |     |   | 22     |   | 110   |  
|Dividends received                                                       |  | (7   | ) | (96    | ) | (74   | )
|Share in income                                                          |  | 19   |   | 316    |   | 170   |  
|Removed investments on consolidation                                     |  | (13  | ) | (21    | ) |      |  
|Reclassification to long-term investments                                |  |     |   |       |   | (26   | )
|Reclassification of investment in Golden Telecom                         |  |     |   | (2,197 | ) |      |  
|Disposal of associates                                                   |  |     |   | (204   | ) |      |  
|Reclassification of investments in ZAO Telecom-center (refer to Note 12) |  |     |   |       |   | (50   | )
|                                                                         |  |      |   |        |   |       |  
|End of year                                                              |  | 330  |   | 331    |   | 2,511 |  
|                                                                         |  |      |   |        |   |       |  

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---



Total income from associates and joint ventures presented in the consolidated statements of income is composed of the following:

|                                                                                 |  | 2006 |  | 2005 |   | 2004 |  
|-------------------------------------------------------------------------------- |  | ---- |  | ---- | - | ---- | -
|Share in income of associates included in movements in investments in associates |  | 19   |  | 316  |   | 170  |  
|Loss from GlobalTel (joint venture until April 25, 2005, see Note 5)             |  |     |  | (147 | ) | (195 | )
|                                                                                 |  |      |  |      |   |      |  
|Total gain/(loss) from associates                                                |  | 19   |  | 169  |   | (25  | )
|                                                                                 |  |      |  |      |   |      |  

Investments in associates as of December 31, 2006, 2005 and 2004 were as follows:

|Associate                                    |                                 | Main activity                                |  | Voting share capital,
%         |   | 2006 Carrying amount |     | 2005 Carrying amount |     | 2004 Carrying amount
|-------------------------------------------- | ------------------------------- | -------------------------------------------- |  | ------------------------------- | - | -------------------- | --- | -------------------- | --- | --------------------
|OAO RTComm.RU                                |                                 | Internet services                            |  | 31                              |   | 217                  |     | 222                  |     | 156                 
|OAO MMTS-9                                   |                                 | Telecommunications services                  |  | 49                              |   | 76                   |     | 73                   |     | 60                  
|Svyazintek                                   |                                 | Implementation of integrated billing systems |  | 19                              |   | 36                   |     | 27                   |     |                    
|Golden Telecom, Inc., USA ("Golden Telecom") |                                 | Telecommunications services                  |  | 10.97
(2005: 11.04,
2004: 11.08 | ) |                     |     |                     |     | 2,067               
|GlobalTel (refer to Note 5)                  |                                 | Satellite telecommunications                 |  | 51                              |   |                     |     |                     |     |                    
|ZAO Telmos                                   |                                 | Telecommunications services                  |  | 20                              |   |                     |     |                     |     | 197                 
|Other                                        |                                 | Various                                      |  |                                 |   | 1                    |     | 9                    |     | 31                  
|                                             |                                 |                                              |  |                                 |   |                      |     |                      |     |                     
|                                             | Total investments in associates |                                              |  |                                 |   |                      | 330 |                      | 331 |                     
|                                             |                                 |                                              |  |                                 |   |                      |     |                      |     |                     

Summarized financial information as of December 31, 2006, 2005 and 2004 and for the years then ended of the associates disclosed above is
presented below:

|Aggregate amounts |  | 2006  |  | 2005  |  | 2004  
|----------------- |  | ----- |  | ----- |  | ------
|Assets            |  | 3,778 |  | 1,353 |  | 24,755
|Liabilities       |  | 2,679 |  | 449   |  | 5,476 
|Revenue           |  | 5,729 |  | 3,401 |  | 20,051
|Net income        |  | 255   |  | 226   |  | 2,151 

All associates are registered in the Russian Federation.

The
main activity of RTComm.RU is provision of Internet access services to enterprises and individuals. As of December 31, 2006, 2005 and 2004, Rostelecom owned 31.09% of voting
shares of RTComm.RU.

F-37

---



Prior
to December 2005, investment into Golden Telecom was accounted for using equity method as the Group exercised significant influence over the financial and operating policies of
Golden Telecom through representation on its Board of Directors since in accordance with the Shareholders' Agreement the Group had the right to appoint 2 out of 10 members to the Board of
Directors of Golden Telecom while other shareholders appointed 1-3 Directors to the Board.

In
December 2005, provisions in the Shareholders' Agreement that gave to the Group the right to appoint two directors to the Board of Golden Telecom lapsed and effective
December 1, 2005, the Group's remaining rights are limited to maintaining membership of less than two directors in the Board of Golden Telecom, depending on the current effective voting power
in the latter. The above change brought to cessation the Group's significant influence over Golden Telecom effective December 1, 2005. Consequently, effective December 1, 2005, the Group
discontinued applying equity method of accounting for its investment in Golden Telecom and reclassified this investment as an available-for-sale financial asset with initial
cost equal to carrying value of equity investment in Golden Telecom at the date of the reclassification. As of December 31, 2006 and 2005 investment in Golden Telecom is measured at its fair
value determined based on NASDAQ closing bid price at the last trading day.

In
April 2005, according to the changed charter of GlobalTel, the Group obtained control over GlobalTel and consolidated the latter in the financial statements as of December 31,
2006 and 2005 (refer to Note 5).

In
March 2005, the Group sold its 20% interest in ZAO Telmos to AFK "Systema" for a cash payment of 235.

The
carrying amount of investments in associates in these consolidated financial statements is equal to the Group's share of underlying equity in the net assets of investee companies,
including goodwill, if any. All associates have a December 31 year-end.

10.   LONG-TERM FINANCIAL INVESTMENTS

Long-term financial investments are Ruble denominated and as of December 31, 2006, 2005 and 2004 comprised the following:

|                                      |  | 2006  |  | 2005  |  | 2004
|------------------------------------- |  | ----- |  | ----- |  | ----
|Investment in Golden Telecom          |  | 4,963 |  | 3,017 |  |    
|Investment in OAO Sberbank of Russia  |  | 724   |  | 298   |  | 107 
|Other long-term financial investments |  | 41    |  | 28    |  | 157 
|                                      |  |       |  |       |  |     
|Total long-term financial investments |  | 5,728 |  | 3,343 |  | 264 
|                                      |  |       |  |       |  |     

Investments in OAO Sberbank of Russia are classified as available-for-sale financial assets and stated at fair
value determined based on RTS closing bid price at the last trading date.

Following
from cessation of Rostelecom's significant influence over Golden Telecom investment in the latter was reclassified into available-for-sale financial
asset (refer to Note 9) and included in the

F-38

---



long-term
investments as of December 31, 2006 and 2005 at fair value determined based on NASDAQ closing bid price at the last trading date.

During
2006, the Group sold its interests in ZAO "Telecross", OOO "RTC-Sibir", OOO "Artelecom-Service", OAO "A-Svyaz",
ZAO "Rostelecomimport" and ZAO AKB "Promsvyazbank" with a carrying value of 11 for a cash payment of 56. As of December 31, 2005 those investments were included in other
long-term financial investments.

In
February 2005, the Group sold its 5% interest in MTT with a carrying value of 180 to AFK "Systema" for a cash payment of 180. As of December 31, 2004 investment in MTT
was included in other long-term financial investments.

Also
during 2005 the Group sold its interests in ZAO "Teleport-TP", OOO "Informtek" and OOO "Teleradiocompany Yalta" with a carrying value of 0.001 for a
cash payment of 40. As of
December 31, 2004 those investments were included in other long-term financial investments.

11.   ACCOUNTS RECEIVABLE

Accounts receivable as of December 31, 2006, 2005 and 2004 comprised the following:

|                                                       |  | 2006   |   | 2005  |   | 2004   |  
|------------------------------------------------------ |  | ------ | - | ----- | - | ------ | -
|Local operators                                        |  | 1,679  |   | 1,849 |   | 1,901  |  
|Subscribers                                            |  | 4,519  |   | 1,083 |   | 1,668  |  
|Other                                                  |  | 1,980  |   | 1,292 |   | 1,734  |  
|Less: allowance for doubtful trade accounts receivable |  | (1,132 | ) | (898  | ) | (1,774 | )
|                                                       |  |        |   |       |   |        |  
|Trade accounts receivable, net                         |  | 7,046  |   | 3,326 |   | 3,529  |  
|                                                       |  |        |   |       |   |        |  
|Prepayments                                            |  | 418    |   | 379   |   | 396    |  
|Prepaid taxes other than on income                     |  | 1,092  |   | 1,210 |   | 1,265  |  
|Other accounts receivable                              |  | 721    |   | 790   |   | 695    |  
|Less: allowance for doubtful other accounts receivable |  | (456   | ) | (473  | ) | (510   | )
|                                                       |  |        |   |       |   |        |  
|Other accounts receivable, net                         |  | 1,775  |   | 1,906 |   | 1,846  |  
|                                                       |  |        |   |       |   |        |  
|Total accounts receivable                              |  | 8,821  |   | 5,232 |   | 5,375  |  
|                                                       |  |        |   |       |   |        |  

Significant increase in accounts receivable (subscribers) is related to the introduction of the new regulations in telecommunications industry
(refer to Note 3).

Trade
accounts receivable, net of allowances for doubtful accounts, include amounts totaling to 696 (2005: 459, 2004: 450) due from foreign telecommunications operators which are
denominated in foreign currencies, principally represented by Special Drawing Rights ("SDR") and US dollars. As of December 31, 2006, 2005 and 2004, the carrying value of trade accounts
receivable approximated their fair value.

F-39

---



The
following table summarizes the changes in the allowance for doubtful accounts receivable for the years ended December 31, 2006, 2005 and 2004:

|                                                      |  | 2006  |   | 2005  |   | 2004  |  
|----------------------------------------------------- |  | ----- | - | ----- | - | ----- | -
|Balance, beginning of year                            |  | 1,371 |   | 2,284 |   | 2,689 |  
|Additions with acquired subsidiaries                  |  | 20    |   |       |   |       |  
|Provision/(recovery) for doubtful accounts receivable |  | 389   |   | (140  | ) | 369   |  
|Accounts receivable written-off                       |  | (186  | ) | (773  | ) | (774  | )
|                                                      |  |       |   |       |   |       |  
|Balance, end of year                                  |  | 1,594 |   | 1,371 |   | 2,284 |  
|                                                      |  |       |   |       |   |       |  

As of December 31, 2006 balance of the allowance for doubtful accounts receivable decreased long-term accounts receivable and
short-term accounts receivable by 6 and 1,588, respectively. Long-term accounts receivable are included in other non-current assets in the consolidated
balance sheets.

12.   SHORT-TERM INVESTMENTS

Short-term investments include investments available-for-sale, which are stated at fair value, and loans and receivables which
are stated at amortized cost using the effective interest rate method. Short-term investments comprised the following as of December 31, 2006, 2005 and 2004:

|                                             |  | 2006  |  | 2005   |  | 2004 
|-------------------------------------------- |  | ----- |  | ------ |  | -----
|VEB bonds (USD denominated)                  |  |      |  |       |  | 195  
|Bills of exchange                            |  | 542   |  | 5,312  |  | 5,247
|Short-term deposits and deposit certificates |  | 7,916 |  | 6,878  |  | 2,658
|Investments in ZAO Telecom-center            |  |      |  |       |  | 50   
|Other                                        |  | 38    |  | 48     |  |     
|                                             |  |       |  |        |  |      
|Total short-term investments                 |  | 8,496 |  | 12,238 |  | 8,150
|                                             |  |       |  |        |  |      

Bills of exchange and short-term deposits and deposit certificates are classified as loans and receivables.

Fair
value of investments, which are traded on active markets, is based on the market quotes for such investments. Fair value of investments, which are not traded on active market, is
based on estimated discounted future cash flows. The discount rate is identified individually for each company and is based on the weighted average cost of capital.

Transactions
with financial instruments are recognized using settlement date accounting. Assets are recognized on the day they are transferred to the Group and derecognized on the day
that they are transferred by the Group.

Vnesheconombank
(VEB) bonds, bearer securities guaranteed by the Ministry of Finance of Russia, had maturity date May 14, 2008, and were stated in the consolidated balance sheets
as of

F-40

---



December 31,
2004 at market value based on quotations obtained from the over the counter market. In June 2005 the Group sold Vnesheconombank (VEB) bonds for consideration of 202.

The
Group invests temporarily available funds in bills of exchange issued by various Russian companies maturing within 12 months after the balance sheet date or with no fixed
maturity, which the Group plans to sell during the next year. The bills of exchange bear interest in the range from 7% to 11% and are denominated in Rubles, as well as in foreign currencies. As of
December 31, 2006, approximately 26% (2005: 33%, 2004: 10%) of the Group's total bills of exchange are denominated in foreign currencies, represented by US dollars. The Group uses bills
of exchange as a financial instrument primarily for the purpose of receiving financial income.

Bills
of exchange include promissory notes issued by OAO Svyazbank, which is related party (refer to Note 27), of 213 (2005: 4,346, 2004: 590). Short-term
deposits include deposits in ZAO Promsvyazbank of 1,390 (2005: 3,274, 2004: 500) and deposits in OAO Svyazbank of 4,650 (2005: nil, 2004: 900). Refer to Note 13 for cash
held in these banks. Management of the Group is constantly monitoring financial position and performance of these banks and believes that amounts invested in promissory notes, cash and
short-term deposits are fully recoverable.

In
March 2005, the Group sold its 45% interest in ZAO Telecom-Center with a carrying value of 50 for a cash payment of 68.

13.   CASH AND CASH EQUIVALENTS

Cash and cash equivalents as of December 31, 2006, 2005 and 2004 included cash on hand and at bank accounts and short-term deposits and bills
of exchange with original maturities of less than three months as follows:

|                                       |  | 2006  |  | 2005  |  | 2004 
|-------------------------------------- |  | ----- |  | ----- |  | -----
|Cash at bankRubles                    |  | 1,147 |  | 2,165 |  | 379  
|Cash at bankForeign currencies        |  | 93    |  | 58    |  | 53   
|Short term depositsRubles             |  | 6     |  | 170   |  | 752  
|Short-term depositsForeign currencies |  |      |  |      |  | 66   
|Short-term bills of exchange           |  | 1,101 |  |      |  |     
|Other                                  |  | 6     |  | 5     |  | 5    
|                                       |  |       |  |       |  |      
|Total cash and cash equivalents        |  | 2,353 |  | 2,398 |  | 1,255
|                                       |  |       |  |       |  |      

As of December 31, 2006, cash at bank in foreign currencies held in escrow accounts on behalf of providers of loans to the Company
amounted to nil (2005: nil, 2004: 32).

Cash
at bank denominated in Rubles include cash held in OAO Svyazbank of 308 (2005: 539, 2004: 8) and cash held in ZAO Promsvyazbank of 22
(2005: 11, 2004: 34). Cash at bank denominated in foreign currencies include cash held in OAO Svyazbank of 11 (2005: nil, 2004: nil).

F-41

---



14.   SHAREHOLDERS' EQUITY



The authorized share capital of the Company as of December 31, 2006, 2005 and 2004 comprised 1,634,026,541 ordinary shares and 242,832,000
non-redeemable preferred shares. The par value of both ordinary and preferred shares amounted to Rbl 0.0025 per share.

As
of December 31, 2006, 2005 and 2004, the issued and outstanding share capital was as follows:

|                                       |  | Number of shares |  | Nominal value |  | Carrying amount
|-------------------------------------- |  | ---------------- |  | ------------- |  | ---------------
|Ordinary Shares, Rbl 0.0025 par value  |  | 728,696,320      |  | 1.822         |  | 75             
|Preferred Shares, Rbl 0.0025 par value |  | 242,831,469      |  | 0.607         |  | 25             
|                                       |  |                  |  |               |  |                
|Total                                  |  | 971,527,789      |  | 2.429         |  | 100            
|                                       |  |                  |  |               |  |                

There were no transactions with own shares during 2006, 2005 and 2004.

The
Board of Directors of Rostelecom is authorized under its Charter to issue additional ordinary shares up to the total of the authorized share capital without further approval of
shareholders.

The
nominal share capital of the Company recorded on its incorporation has been indexed, to account for the effects of inflation from that date through December 31, 2002. The
share capital in the Russian
statutory accounts at December 31, 2006, 2005 and 2004 amounted to 2,428,819 nominal (uninflated) Rubles.

Ordinary
shares carry voting rights with no guarantee of dividends.

Preferred
shares have priority over ordinary shares in the event of liquidation but carry no voting rights except on resolutions regarding liquidation or reorganization of the Company,
changes to dividend levels of preferred shares, or the issuance of additional preferred stock. Such resolutions require two-thirds approval of preferred shareholders. The preferred shares
have no rights of redemption or conversion.

Preferred
shares carry dividends amounting to the higher of 10% of the net income after taxation of the Company as reported in the Russian statutory accounts divided by the number of
preferred shares and the dividends paid on one ordinary share. If the holders of preferred shares receive dividends of less than 10% of the net income after taxation as reported in the Russian
statutory accounts, no dividends to the holders of ordinary shares are declared. Owners of preferred shares have the right to participate in and vote on all issues within the competence of general
meetings following the annual general meeting at which a decision not to pay (or to pay partly) dividends on preferred shares has been taken.

In
case of liquidation, the property remaining after settlement with creditors, payment of preferred dividends and redemption of the par value of preferred shares is distributed among
preferred and ordinary shareholders proportionately to number of owned shares.

F-42

---



Accordingly,
the Company's preferred shares are considered participating equity instruments for the purpose of earnings per share calculations (refer to Note 25).

Distributable
earnings of all entities included in the Group are limited to their respective retained earnings, as mandated by statutory accounting rules. Statutory retained earnings of
the Company as of December 31, 2006, 2005 and 2004 amounted to 35,171, 28,972 and 20,670, respectively.



In accordance with the Company's Charter, Rostelecom has to maintain a reserve fund through a mandatory annual transfer of at least 5% of its statutory net
profits up to the maximum amount of 15% of its statutory share capital. As of December 31, 2006, 2005 and 2004 the statutory reserve fund amounted to 364,323 nominal (uninflated) Rubles. These
amounts are prohibited for distribution by current Russian legislation except for some limited cases.



Dividends declared to holders of preferred and ordinary shares in respect of the years ending December 31, 2005, 2004 and 2003 were as follows:

|                          |  | 2006  |  | 2005  |  | 2004 
|------------------------- |  | ----- |  | ----- |  | -----
|Dividendpreferred shares |  | 903   |  | 722   |  | 790  
|Dividendordinary shares  |  | 1,138 |  | 1,064 |  | 640  
|                          |  |       |  |       |  |      
|Total dividends           |  | 2,041 |  | 1,786 |  | 1,430
|                          |  |       |  |       |  |      

|                             |  | Rbl  |  | Rbl  |  | Rbl 
|---------------------------- |  | ---- |  | ---- |  | ----
|Dividend per preferred share |  | 3.72 |  | 2.97 |  | 3.25
|Dividend per ordinary share  |  | 1.56 |  | 1.46 |  | 0.88

F-43

---





15.   ACCOUNTS PAYABLE, PROVISIONS AND ACCRUED EXPENSES

Accounts payable, provisions and accrued expenses consisted of the following as of December 31, 2006, 2005 and 2004:

|                                                              |  | 2006  |  | 2005  |  | 2004 
|------------------------------------------------------------- |  | ----- |  | ----- |  | -----
|Trade accounts payable                                        |  | 6,100 |  | 3,064 |  | 2,226
|Short-term portion of pension obligations (refer to Note 24)  |  | 63    |  | 49    |  | 76   
|Short-term portion of site restoration provisions             |  | 26    |  | 8     |  |     
|Compensation related accruals                                 |  | 741   |  | 540   |  | 444  
|Other accrued expenses                                        |  | 375   |  | 339   |  | 325  
|Dividends payable                                             |  | 67    |  | 56    |  | 120  
|                                                              |  |       |  |       |  |      
|Current accounts payable, provisions and accrued expenses     |  | 7,372 |  | 4,056 |  | 3,191
|                                                              |  |       |  |       |  |      
|Long-term portion of pension obligations (refer to Note 24)   |  | 112   |  | 123   |  | 108  
|Long-term portion of site restoration provisions              |  | 78    |  | 17    |  |     
|Long-term advances received                                   |  | 69    |  | 87    |  | 112  
|Other long-term accounts payable                              |  | 67    |  | 151   |  | 120  
|                                                              |  |       |  |       |  |      
|Non-current accounts payable, provisions and accrued expenses |  | 326   |  | 378   |  | 340  
|                                                              |  |       |  |       |  |      
|Total accounts payable, provisions and accrued expenses       |  | 7,698 |  | 4,434 |  | 3,531
|                                                              |  |       |  |       |  |      

Significant increase in trade accounts payable is related to the introduction of the new regulations in telecommunications industry (refer to
Note 3).

As
of December 31, 2006, other accrued expense included a liability of 15 related to the interest rate swap agreement with Credit Suisse International (see Notes 4
and 18).

As
of December 31, 2006, trade accounts payable included amounts totaling to 1,423 which are denominated in foreign currencies, principally represented by Special Drawing Rights
and US Dollars (2005: 1,595, 2004: 1,404).

Site
restoration provisions represent present value of the expenditures the Company expects to incur in connection with phasing out of analog trunk lines during 2007-2010 in
accordance with the formalized plan of the Company (refer also to Note 6). The discount rate of 16.65% was used based on the weighted average cost of capital. As of December 31, 2006 and
2005 total amounts of site restoration provisions equal to 104 and 25, respectively, of which 26 (2005: 8) are included in accounts payable and accrued expenses and 78 (2005: 17) are
included in non-current accounts payable in the consolidated balance sheets as of December 31, 2006 and 2005, respectively.

16.   FINANCE LEASE PAYABLE

In April 2005, the Group entered into an IRU finance lease agreement for use a portion of the network capacity of a terrestrial optical fiber cables. The lease
agreement is non-cancellable for the period of 15 years, which approximates the remaining useful life of the above optical fibers. Effective interest rate of the lease is 7.21% p.a.
Lease payments are denominated in US Dollars.

F-44

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Also
the Group is involved into a finance lease agreement for use of a digital telecommunications station over its estimated remaining useful life of 7 years. Effective interest
rate of the lease is 11.7% p.a. Lease payments are denominated in Rubles.

In
2006, the Group entered into a number of minor finance lease agreements for purchase of telecommunications equipment and vehicles for an average period of 3 years. Effective
interest rate of these leases varies from 10.3% to 12.2% p.a.

Future
minimum lease payments together with the present value of the net minimum lease payments as of December 31, 2006, 2005 and 2004 are as follows:

|                                                 |                                              | 2006 |     | 2005 |     | 2004
|------------------------------------------------ | -------------------------------------------- | ---- | --- | ---- | --- | ----
|Finance lease liabilitiesminimum lease payments |                                              |      |     |      |     |     
|                                                 | Current portion of finance lease liability   |      | 111 |      | 53  |     
|                                                 | Between one to two years                     |      | 83  |      | 44  |     
|                                                 | Between two to three years                   |      | 93  |      | 44  |     
|                                                 | Between three to four years                  |      | 43  |      | 44  |     
|                                                 | Between four to five years                   |      | 43  |      | 44  |     
|                                                 | Over five years                              |      | 349 |      | 438 |     
|                                                 |                                              |      |     |      |     |     
|Total minimum lease payments                     |                                              | 722  |     | 667  |     |    
|Less interest                                    |                                              | (217 | )   | (246 | )   |    
|                                                 |                                              |      |     |      |     |     
|Present value of minimum lease payments          |                                              | 505  |     | 421  |     |    
|                                                 |                                              |      |     |      |     |     
|Present value of minimum lease payments          |                                              |      |     |      |     |     
|Not later than 1 year                            |                                              | 78   |     | 52   |     |    
|                                                 |                                              |      |     |      |     |     
|                                                 | Later than 1 year and not later than 5 years |      | 163 |      | 144 |     
|                                                 | Later than 5 years                           |      | 264 |      | 225 |     
|                                                 |                                              |      |     |      |     |     
|Total non-current lease payable                  |                                              | 427  |     | 369  |     |    
|                                                 |                                              |      |     |      |     |     
|Total lease payable                              |                                              | 505  |     | 421  |     |    
|                                                 |                                              |      |     |      |     |     

Depreciation of property, plant and equipment under the finance lease contracts for 2006 and 2005 amounted to 50 and 10, respectively (refer to
Note 6). Finance charges for the year ended December 31, 2006 and 2005 amounted to 44 and 14, respectively, and are included in interest expense in the consolidated statement
of income.

F-45

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17.   VENDOR FINANCING PAYABLE

Vendor financing payable includes the following as of December 31, 2006, 2005 and 2004:

|                                             |  | 2006  |  | 2005  |  | 2004 
|-------------------------------------------- |  | ----- |  | ----- |  | -----
|Globalstar L.P.                              |  | 1,249 |  | 1,289 |  |     
|IBM Corporation                              |  |      |  | 388   |  | 706  
|Peter Service                                |  | 391   |  |      |  |     
|                                             |  |       |  |       |  |      
|Vendor financing payablecurrent portion     |  | 1,640 |  | 1,677 |  | 706  
|                                             |  |       |  |       |  |      
|IBM Corporation                              |  |      |  |      |  | 353  
|Peter Service                                |  | 362   |  |      |  |     
|                                             |  |       |  |       |  |      
|Vendor financing payablenon-current portion |  | 362   |  |      |  | 353  
|                                             |  |       |  |       |  |      
|Total vendor financing                       |  | 2,002 |  | 1,677 |  | 1,059
|                                             |  |       |  |       |  |      

As of December 31, 2006, the Group had the following outstanding vendor financing payable:



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18.   LONG-TERM LOANS

Long-term loans as of December 31, 2006, 2005 and 2004 were as follows:

|Maturity                                      |  | 2006  |  | 2005  |  | 2004 
|--------------------------------------------- |  | ----- |  | ----- |  | -----
|Current portion of interest bearing loans     |  | 3,005 |  | 851   |  | 1,107
|                                              |  |       |  |       |  |      
|Between one to two years                      |  | 198   |  | 621   |  | 570  
|Between two to three years                    |  | 63    |  | 587   |  | 109  
|Between three to four years                   |  | 37    |  | 544   |  | 72   
|Between four to five years                    |  |      |  | 520   |  | 26   
|Over five years                               |  |      |  | 960   |  |     
|                                              |  |       |  |       |  |      
|Non-current portion of interest bearing loans |  | 298   |  | 3,232 |  | 777  
|                                              |  |       |  |       |  |      
|Total interest bearing loans                  |  | 3,303 |  | 4,083 |  | 1,884
|                                              |  |       |  |       |  |      

As of December 31, 2006, 2005 and 2004, interest bearing loans, which are mostly denominated in foreign currencies, were as follows:

|                                   |  | Note |   | 2006  |  | 2005  |  | 2004 
|---------------------------------- |  | ---- | - | ----- |  | ----- |  | -----
|US Dollars (US$)                   |  | (a   | ) | 3,055 |  | 3,812 |  | 1,457
|Japanese Yen (JPY)                 |  | (b   | ) | 32    |  | 103   |  | 188  
|EURO                               |  | (c   | ) | 123   |  | 168   |  | 239  
|                                   |  |      |   |       |  |       |  |      
|Foreign currency denominated loans |  |      |   | 3,210 |  | 4,083 |  | 1,884
|Russian Ruble denominated loans    |  | (d   | ) | 93    |  |      |  |     
|                                   |  |      |   |       |  |       |  |      
|Total interest bearing loans       |  |      |   | 3,303 |  | 4,083 |  | 1,884
|                                   |  |      |   |       |  |       |  |      

As of December 31, 2006, the Group had the following loans outstanding:



F-47

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F-48

---





During
2006 the Group made final payments on promissory notes issued to Alfa-bank in 2003.

During
2005 the Group fully repaid the loan payable to Sumitomo Corporation on a credit agreement entered into in March 1997.

As
of December 31, 2006, 2005 and 2004, the weighted average interest rates of loans were 7.8%, 5.4% and 6.1%, respectively. Under IAS No. 39, "Financial Instruments:
Recognition and Measurement", loans are reflected in the financial statements at amortized cost, i.e. the amount at which they were measured at initial recognition less principal repayments,
plus or minus the cumulative amortization of any difference between that initial amount and the maturity amount. The carrying amount of interest bearing loans equals their amortized cost.

The
Group does not utilize financial instruments to hedge against its exposure to fluctuations in foreign exchange rates.

In
connection with the $100 million loan from Vnesheconombank and CSFB, on June 28, 2006, the Group concluded interest rate swap agreement with CSFB. In accordance with the
interest rate swap agreement each June 28 and December 28, commencing on December 28, 2006 and ending on December 28, 2012, the Group undertakes an obligation to CSFB in
the amount of 8.55% of the outstanding Vnesheconombank loan balance and CSFB undertakes an obligation to the Group in the amount of LIBOR plus 3.25% of the outstanding Vnesheconombank loan balance.
The Group did not designate the above interest rate swap derivative as hedging instrument. Therefore, this financial instrument was classified as financial liability at fair value of 15 (refer to
Note 15). The net loss of 15 related to the change in the fair value of the interest rate swap contract was included in the non-operating income in the consolidated income statement
for the year ended December 31, 2006.

19.   SHORT-TERM BORROWINGS

As of December 31, 2006, the Group had the following short-term borrowings outstanding:



F-49

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20.   INCOME TAXES

The components of net deferred tax assets and liabilities at December 31, 2006, 2005 and 2004, and the respective movements during 2006, 2005 and 2004,
were as follows:

|                                                  |  |       |  |     |  | Movement during 2006 recognized in |  |       
|------------------------------------------------- |  | ----- |  | --- |  | ---------------------------------- |  | ------
|
|Tax effects of future tax deductible items        |  |       |  |     |  |                                    |  |       
|Property, plant and equipment                     |  |      |  | 2   |  |                                   |  | (2    
|Accounts receivable                               |  | 171   |  | 5   |  |                                   |  | (76   
|Accounts payable, provisions and accrued expenses |  |      |  | 10  |  |                                   |  | 236   
|Other                                             |  | 27    |  | 17  |  |                                   |  | 57    
|                                                  |  |       |  |     |  |                                    |  |       
|Gross deferred tax asset                          |  | 198   |  | 34  |  |                                   |  | 215   
|                                                  |  |       |  |     |  |                                    |  |       
|Tax effects of future taxable items:              |  |       |  |     |  |                                    |  |       
|Investments valuation difference                  |  | 449   |  |    |  | 570                                |  | 7     
|Property, plant and equipment                     |  | 3,718 |  |    |  |                                   |  | (1,002
|Other intangible assets                           |  |      |  | 161 |  |                                   |  | (12   
|Accounts payable, provisions and accrued expenses |  | 202   |  |    |  |                                   |  | (202  
|                                                  |  |       |  |     |  |                                    |  |       
|Gross deferred tax liability                      |  | 4,369 |  | 161 |  | 570                                |  | (1,209
|                                                  |  |       |  |     |  |                                    |  |       
|Net deferred tax liability                        |  | 4,171 |  | 127 |  | 570                                |  | (1,424
|                                                  |  |       |  |     |  |                                    |  |       

F-50

---



|                                                  |  |       |  | Movement during 2005 recognized in |   |       
|------------------------------------------------- |  | ----- |  | ---------------------------------- | - | ------
|
|Tax effects of future tax deductible items        |  |       |  |                                    |   |       
|Investment valuation difference                   |  | 34    |  | (34                                | ) |      
|Accounts receivable                               |  | 474   |  |                                   |   | (303  
|Other                                             |  | 9     |  |                                   |   | 18    
|                                                  |  |       |  |                                    |   |       
|Gross deferred tax asset                          |  | 517   |  | (34                                | ) | (285  
|                                                  |  |       |  |                                    |   |       
|Tax effects of future taxable items:              |  |       |  |                                    |   |       
|Investments valuation difference                  |  |      |  | 317                                |   | 132   
|Property, plant and equipment                     |  | 6,203 |  |                                   |   | (2,485
|Accounts payable, provisions and accrued expenses |  | 268   |  |                                   |   | (66   
|                                                  |  |       |  |                                    |   |       
|Gross deferred tax liability                      |  | 6,471 |  | 317                                |   | (2,419
|                                                  |  |       |  |                                    |   |       
|Net deferred tax liability                        |  | 5,954 |  | 351                                |   | (2,134
|                                                  |  |       |  |                                    |   |       

|                                                  |  |       |  | Movement during 2004 recognized in |   |       
|------------------------------------------------- |  | ----- |  | ---------------------------------- | - | ------
|
|Tax effects of future tax deductible items:       |  |       |  |                                    |   |       
|Investment valuation difference                   |  | 44    |  | (11                                | ) | 1     
|Accounts payable, provisions and accrued expenses |  | 187   |  |                                   |   | (187  
|Accounts receivable                               |  | 369   |  |                                   |   | 105   
|Other                                             |  | 3     |  |                                   |   | 6     
|                                                  |  |       |  |                                    |   |       
|Gross deferred tax asset                          |  | 603   |  | (11                                | ) | (75   
|                                                  |  |       |  |                                    |   |       
|Tax effects of future taxable items:              |  |       |  |                                    |   |       
|Property, plant and equipment                     |  | 7,690 |  |                                   |   | (1,487
|Accounts payable, provisions and accrued expenses |  |      |  |                                   |   | 268   
|Leasing arrangements                              |  | 395   |  |                                   |   | (395  
|                                                  |  |       |  |                                    |   |       
|Gross deferred tax liability                      |  | 8,085 |  |                                   |   | (1,614
|                                                  |  |       |  |                                    |   |       
|Net deferred tax liability                        |  | 7,482 |  | 11                                 |   | (1,539
|                                                  |  |       |  |                                    |   |       

Differences between IFRS and statutory taxation and reporting regulations give rise to temporary differences between the carrying value of certain
assets and liabilities for financial reporting and profits tax purposes. The tax effect of these temporary differences is recorded at the rate of 24% (investment valuationat 9%).

F-51

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Deferred
tax assets and liabilities are offset when there is a legally enforceable right to set off current tax assets against current tax liabilities and the deferred income tax assets
and deferred income tax liabilities relate to the income taxes levied by the same fiscal authority on the same taxable entity.

The
components of income tax expense for the years ended December 31, 2006, 2005 and 2004 were as follows:

|                     |  | 2006   |   | 2005   |   | 2004   |  
|-------------------- |  | ------ | - | ------ | - | ------ | -
|Current tax charge   |  | 2,411  |   | 2,829  |   | 2,892  |  
|Deferred tax benefit |  | (1,424 | ) | (2,134 | ) | (1,539 | )
|                     |  |        |   |        |   |        |  
|Income tax expense   |  | 987    |   | 695    |   | 1,353  |  
|                     |  |        |   |        |   |        |  

The reconciliation of the theoretical amount that would arise using the Russian statutory rate of 24% to the total actual income tax was as
follows for the years ending December 31, 2006, 2005 and 2004:

|                                                      |  | 2006 |  | 2005 |   | 2004  |  
|----------------------------------------------------- |  | ---- |  | ---- | - | ----- | -
|Income tax expense at statutory rate (24%)            |  | 586  |  | 401  |   | 1,349 |  
|Change in assessment for current tax of prior periods |  | 2    |  | 28   |   | 62    |  
|Effect of share in income taxes of associates         |  |     |  | (156 | ) | (143  | )
|Permanent differences                                 |  | 399  |  | 422  |   | 85    |  
|                                                      |  |      |  |      |   |       |  
|Income tax expense                                    |  | 987  |  | 695  |   | 1,353 |  
|                                                      |  |      |  |      |   |       |  

Permanent differences comprise various costs that are non-deductible for Russian profits tax purposes, including depreciation of
certain property, plant and equipment, certain employee costs, promotional and sponsorship expenditures, travel expenditures in excess of certain statutory allowances and other expenses and
non-deductible taxable revenue from free-of -charge services.

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21.   REVENUE

Revenue comprised the following for the years ending December 31, 2006, 2005 and 2004:

|                                                         |  | 2006   |  | 2005   |  | 2004  
|-------------------------------------------------------- |  | ------ |  | ------ |  | ------
|Telephone traffic                                        |  |        |  |        |  |       
|Domestic long-distance traffic                           |  | 31,370 |  | 18,126 |  | 17,297
|Outgoing international long-distance traffic             |  | 13,271 |  | 9,405  |  | 9,060 
|Incoming and transit international long-distance traffic |  | 4,480  |  | 4,098  |  | 4,041 
|                                                         |  |        |  |        |  |       
|                                                         |  | 49,121 |  | 31,629 |  | 30,398
|                                                         |  |        |  |        |  |       
|Rent of channels                                         |  | 7,116  |  | 6,045  |  | 4,623 
|Other revenue                                            |  |        |  |        |  |       
|Television and radio transmission                        |  | 528    |  | 574    |  | 602   
|Satellite services                                       |  | 559    |  | 548    |  |      
|Internet access                                          |  | 217    |  | 44     |  |      
|FreePhone services                                       |  | 761    |  | 430    |  | 142   
|Miscellaneous revenue                                    |  | 3,257  |  | 1,685  |  | 1,553 
|                                                         |  |        |  |        |  |       
|                                                         |  | 5,322  |  | 3,281  |  | 2,297 
|                                                         |  |        |  |        |  |       
|Total revenue                                            |  | 61,559 |  | 40,955 |  | 37,318
|                                                         |  |        |  |        |  |       

As described in Note 3 above, effective January 1, 2006, as a result of regulatory reform in the telecommunications industry, new
regulations and rules were put in force that changed principles of interaction between the Group, local operators and end users in providing long-distance services. The introduction of the
new settlement system represents a change in business practice resulting in new accounting for changed practice. Refer to Note 3 for the summary of impact the new settlement system on
the Groups revenues and related expenses.

22.   SEGMENT INFORMATION

The Group operates in one industry segment, being the provision of domestic and international long- distance telecommunications services in the
Russian Federation. The results of this segment and assets and liabilities as of December 31, 2006, 2005 and 2004 are presented in the consolidated statements of income and the consolidated
balances sheet, respectively.

An
analysis of revenue by service type is disclosed in Note 21. A geographical analysis of revenue by the country or region of the customer for the years ending
December 31, 2006, 2005 and 2004 is as follows:

|     |  | Russia |  | CIS   |  | USA |  | Western Europe |  | Eastern Europe |  | Others |  | Total 
|---- |  | ------ |  | ----- |  | --- |  | -------------- |  | -------------- |  | ------ |  | ------
|2006 |  | 56,360 |  | 2,227 |  | 475 |  | 1,515          |  | 241            |  | 741    |  | 61,559
|2005 |  | 36,249 |  | 2,626 |  | 233 |  | 1,049          |  | 194            |  | 604    |  | 40,955
|2004 |  | 32,758 |  | 2,670 |  | 256 |  | 966            |  | 191            |  | 477    |  | 37,318

F-53

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Substantially all of the Group assets are located within the territory of the Russian Federation.

The
Group had no individual customers, other than the Government of the Russian Federation and its related parties (refer to Note 27), that accounted for greater than 10% of its
revenue during the years ended December 31, 2006, 2005 and 2004.

23.   ADMINISTRATION AND OTHER COSTS

Administration and other costs consisted of the following for the years ended December 31, 2006, 2005 and 2004:

|                                     |  | 2006  |  | 2005  |  | 2004  |  
|------------------------------------ |  | ----- |  | ----- |  | ----- | -
|Administration costs                 |  | 1,648 |  | 952   |  | 674   |  
|Advertising and similar costs        |  | 748   |  | 231   |  | 162   |  
|Office maintenance                   |  | 1,543 |  | 1,287 |  | 1,264 |  
|Utilities and similar services       |  | 655   |  | 613   |  | 533   |  
|Consulting and similar services      |  | 312   |  | 220   |  | 208   |  
|Insurance                            |  | 321   |  | 367   |  | 389   |  
|Extinguishment of liabilities        |  |      |  |      |  | (428  | )
|Other                                |  | 326   |  | 207   |  | 551   |  
|                                     |  |       |  |       |  |       |  
|Total administration and other costs |  | 5,553 |  | 3,877 |  | 3,353 |  
|                                     |  |       |  |       |  |       |  

Extinguishment of liabilities represents a previously recorded liability for which there is no longer a legal obligation. The effect of the
extinguishment has been recorded in administration and other costs as this is where it originally has been recorded.

24.   EMPLOYEE BENEFITS

The numbers of employees of the Group was equal to 23 233 as at December 31, 2006 (2005: 23,634, 2004: 25,285).

The
Group makes payments to the Government pension fund for its employees. Such contributions are included in the unified social tax ("UST") calculated by the Group using regressive
scale and are charged to expense when incurred during the employee's service period. Total contributions for UST amounted to 529 during the year ended December 31, 2006 (2005: 520,
2004: 567).

The
Company participates in the private Joint Participation Program, which is a pension plan with defined contributions. To participate in the program, individuals should be
full-time employees of the Company and should enter into non-state pension insurance agreement with NPF "Telecom-Soyuz", which is the successor of NPF "Rostelecom-Garantiya".
Total expenses of the Group under this program amounted to 6 during the year ended December 31, 2006 (2005: 14, 2004: 13) and are included in wages, salaries, other benefits and
payroll taxes in the consolidated statements of income.

The
Company also operates a defined benefit pension scheme covering a large number of its employees, which requires contributions to be made to NPF "Telecom-Soyuz". Under the scheme

F-54

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certain
annuity is acquired by the Company as of the termination date of an employee if the latter satisfies certain criteria, such as seniority of 15 years in telecommunications sector,
including seniority of 5 years in the Company, and retirement on pension within one month after the date an employee is entitled to pension in accordance with Russian legislation.

The
following table summarizes movements in the present value of the defined benefit obligation and amounts recognized in the consolidated balance sheet for the above plan (refer to
Note 15):

|                                       |  | 2006 |   | 2005 |   | 2004 |  
|-------------------------------------- |  | ---- | - | ---- | - | ---- | -
|Opening defined benefit obligation     |  | 290  |   | 258  |   | 292  |  
|Interest cost on benefit obligation    |  | 20   |   | 13   |   | 16   |  
|Current service cost                   |  | 15   |   | 17   |   | 15   |  
|Past service cost                      |  |     |   | 84   |   | 19   |  
|Actuarial losses/(gains) on obligation |  | 38   |   | (23  | ) | (34  | )
|Benefits paid                          |  | (86  | ) | (59  | ) | (50  | )
|Closing defined benefit obligation     |  | 277  |   | 290  |   | 258  |  
|Unrecognized past service cost         |  | (102 | ) | (118 | ) | (74  | )
|                                       |  |      |   |      |   |      |  
|Liability recognized in balance sheet  |  | 175  |   | 172  |   | 184  |  
|                                       |  |      |   |      |   |      |  

Amounts recognized in wages, salaries, other benefits and payroll taxes in the consolidated statement of income in respect of the above defined
benefit plan are as follows:

|                                       |  | 2006 |  | 2005 |   | 2004 |  
|-------------------------------------- |  | ---- |  | ---- | - | ---- | -
|Interest cost on benefit obligation    |  | 20   |  | 13   |   | 16   |  
|Current service cost                   |  | 15   |  | 17   |   | 15   |  
|Amortization of past service cost      |  | 16   |  | 40   |   | 31   |  
|Actuarial losses/(gains) on obligation |  | 38   |  | (23  | ) | (34  | )
|                                       |  |      |  |      |   |      |  
|Total net benefit expense              |  | 89   |  | 47   |   | 28   |  
|                                       |  |      |  |      |   |      |  

The principal assumptions used in determining pension benefit obligation for the Group's plan are shown below:

|                                         |  | 2006  |  | 2005 |  | 2004 
|---------------------------------------- |  | ----- |  | ---- |  | -----
|Discount rate                            |  | 7.9%  |  | 7.7% |  | 8.7% 
|Employee turnover rate                   |  | 10.5% |  | 8.4% |  | 10.5%
|Expected average annual salary increases |  | 7%    |  | 6%   |  | 7%   

The expected amount of benefits to be paid in 2007 is 86.

F-55

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25.   EARNINGS PER SHARE

The calculation of basic and diluted earnings per preferred and ordinary share is presented below (earnings per share data is stated in Rubles):

|                                                        |  | 2006        |  | 2005        |  | 2004       
|------------------------------------------------------- |  | ----------- |  | ----------- |  | -----------
|Net income attributable to equity holders of the parent |  | 1,458       |  | 978         |  | 4,266      
|                                                        |  |             |  |             |  |            
|
|Weighted average number of shares outstanding           |  | 242,831,469 |  | 728,696,320 |  | 242,831,469
|                                                        |  |             |  |             |  |            
|Basic and diluted earnings per share, Russian Rubles    |  | 1.50        |  | 1.50        |  | 1.01       
|                                                        |  |             |  |             |  |            

The calculation of earnings per share is based on net profit for the period divided by the weighted average number of preferred and ordinary
shares outstanding during the year. Dividends are fully allocated to continuing operations.

There
are no potentially dilutive instruments, therefore, diluted earnings per share equal basic earnings per share.

26.   FAIR VALUE OF FINANCIAL INSTRUMENTS

Fair value is the amount at which a financial instrument could be exchanged in a current transaction between willing parties, other than in a forced sale or
liquidation, and is best evidenced by a quoted market price.

For
monetary assets and liabilities, the carrying amounts approximate their fair value and balance sheet items denominated in foreign currencies have been translated at appropriate
period end exchange rates.

The
carrying amounts of cash and cash equivalents approximate their respective fair values due to their short-term nature and negligible credit losses.

27.   RELATED PARTY TRANSACTIONS

(a)   The Government and OAO Svyazinvest as a shareholder

As indicated in Note 1, the immediate parent company of the Company is OAO Svyazinvest, which holds 50.67% of the voting capital of the Company, and its
representatives comprise a majority of the Board of Directors. The Government of the Russian Federation, in turn, holds 75% less one share of the voting capital of OAO Svyazinvest and, therefore,
ultimately controls the Company. It is a matter of Government policy to retain a controlling stake in sectors of the economy, such as telecommunications, that it views as strategic.

F-56

---



(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 Agency, has the general authority to regulate domestic tariffs, and does regulate tariffs. The Ministry of Information Technologies and Communications of
the Russian Federation has control over the licensing of providers of telecommunications services.

As
discussed in detail in Note 3, as part of the regulatory reform and restructuring of the national telecommunications sector aimed to facilitate competition and make the
industry more attractive for investors, in 2005 the Ministry of Information Technologies and Communications issued a number of new rules and regulations that resulted in change of the Group's status
as a monopoly supplier of long distance and international communications effective January 1, 2006.

(c)   Transactions with the Svyazinvest Group

The Svyazinvest Group uses the Group's network to carry traffic between its regional and other operators and to and from these regional operators, and to and from
international operators.

The
Group uses the regional networks of the Svyazinvest Group to complete calls and other traffic, including that originating from its direct subscribers in the city of Moscow.

Tariffs
for services between the Company and the Svyazinvest Group are materially affected with governmental regulation as disclosed in paragraph (b) of this note.

The
Group also consumes design services from certain companies of the Svyazinvest Group which are included in 2006 in additions of property, plant and equipment in amount of 36
(2005: 47, 2004: 19).

The
Group makes certain contributions to non-for-profit organizations which are companies of the Svyazinvest Group.

The
Group makes contributions to the non-state pension fund which provides the Company's employees with a number of post-employment benefits (refer to
Note 24). OAO Svyazinvest executes significant influence over the operations of the fund.

F-57

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

|                                                                                           |  | 2006    |   | 2005   |   | 2004   |  
|------------------------------------------------------------------------------------------ |  | ------- | - | ------ | - | ------ | -
|Revenue                                                                                    |  | 1,460   |   | 17,475 |   | 16,987 |  
|Charges by network operatorsnational                                                      |  | (22,598 | ) | (6,757 | ) | (6,362 | )
|Administration and other costs                                                             |  | (71     | ) | (72    | ) | (16    | )
|Contributions to non-for-profit organizations (included in administration and other costs) |  | (1      | ) | (125   | ) | (244   | )
|Contributions in pension fund included in wages, salaries, other benefit and payroll taxes |  | (92     | ) | (167   | ) | (77    | )

Significant decrease in revenues from and increase in charges by local network operators is related to the new interconnection and settlement
regulations effective January 1, 2006 (refer to Note 3 for further details).

In
addition, OAO Svyazinvest participates in the dividends declared by the Company, commensurate with its shareholding.

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

|                                        |  | 2006   |   | 2005  |   | 2004  |  
|--------------------------------------- |  | ------ | - | ----- | - | ----- | -
|Short-term investments                  |  | 2      |   | 2     |   | 5     |  
|Accounts receivable                     |  | 735    |   | 1,017 |   | 1,218 |  
|Accounts payable                        |  | (1,677 | ) | (82   | ) | (301  | )
|Payable to non-for-profit organizations |  | (24    | ) | (117  | ) |      |  

(d)   Transactions with the Government

Other state bodies ("Budget Organizations"), such as the Ministry of Defense and entities funded by the Government, mainly use the Group's network to carry
communications traffic and to broadcast
across the country. The Group also consumes some services having both production and miscellaneous nature.

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

|                                                                                                 |  | 2006  |   | 2005  |   | 2004  |  
|------------------------------------------------------------------------------------------------ |  | ----- | - | ----- | - | ----- | -
|Revenue                                                                                          |  | 4,385 |   | 2,148 |   | 2,180 |  
|Charges by network operatorsnational                                                            |  | (351  | ) |      |   |      |  
|Administration and other costs                                                                   |  | (821  | ) | (47   | ) | (37   | )
|Contributions to Fund of Telecommunications History (included in administration and other costs) |  | (16   | ) | (23   | ) | (24   | )

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The amounts of receivables and payables due from and to such organizations were as follows:

|                    |  | 2006 |   | 2005 |   | 2004 |  
|------------------- |  | ---- | - | ---- | - | ---- | -
|Accounts receivable |  | 467  |   | 261  |   | 346  |  
|Accounts payable    |  | (219 | ) | (88  | ) | (24  | )

The Group is also involved in providing telecommunications services to a significant number of commercial entities which are directly or
indirectly controlled by the Government or subsidiaries of governmentally controlled entities. Since, the Company's tariffs are regulated by the Government and the Company is obliged to provide
services to all customers on the basis of public offer, telecommunications services to governmentally controlled or related commercial entities are provided on the same basis (tariffs and access to
the Company's network) as to any other unrelated commercial entity. The following table summarized the effect of transactions with the above entities on the consolidated financial statements of
the Group:

|                                               |  | 2006 |  | 2005 |  | 2004
|---------------------------------------------- |  | ---- |  | ---- |  | ----
|Share of total revenue                         |  | 1.2% |  | 3.9% |  | 3.9%
|Share of charges by network operatorsnational |  | 5.1% |  | 5.4% |  | 4.5%
|Share of accounts receivable, net              |  | 3.2% |  | 5.4% |  | 6.2%
|Share of trade accounts payable                |  | 3.8% |  | 0.9% |  | 0.4%

The Company deposits available cash with OAO Sberbank of Russia in which Government of the Russian Federation controls 57.6%. As of
December 31, 2006, 2005 and 2004 short-term deposits held in OAO Sberbank of Russia amounted to nil, 1,000 and nil, respectively. As of December 31, 2006, 2005 and 2004 cash
held in OAO Sberbank of Russia amounted to 641, 1,364 and 291, respectively.

(e)   Transactions with investees

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

|                                      |  | 2006 |   | 2005  |   | 2004  |  
|------------------------------------- |  | ---- | - | ----- | - | ----- | -
|Revenue                               |  | 556  |   | 1,347 |   | 1,404 |  
|Charges by network operatorsnational |  | (102 | ) | (162  | ) | (262  | )

The Group also consumes design services from OAO Svyazintek which are included in 2006 in additions of property, plant and equipment in amount of
442 (2005: 34, 2004: nil).

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Amounts
included in the consolidated balance sheets relating to the operations with these entities were as follows:

|                                      |  | 2006 |   | 2005 |   | 2004 |  
|------------------------------------- |  | ---- | - | ---- | - | ---- | -
|Accounts receivable                   |  | 39   |   | 475  |   | 235  |  
|Accounts payable and accrued expenses |  | (18  | ) | (23  | ) | (29  | )

(f)    Key management personnel's remuneration

During the year the Board of Directors consisted of the following members:

|Until June 25, 2006                                                                                                                                               |  | Until December 31, 2006                                                                                                                                     
|----------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------
|Yashin V.N.
Avdiyants S.P.
Degtyarev V.V.
Yerokhin D.Ye.
Kiselev A.N.
Kuznetsov S.I.
Ragozina I.M.
Slipenchuk M.V.
Slizen V.A.
Terentyeva N.A.
Chechelnitsky E.A. |  | Yashin V.N.
Bobin V.N.
Degtyarev V.V.
Yerokhin D.Ye.
Kiselev A.N.
Kuznetsov S.I.
Ragozina I.M.
Panchenko S.N.
Selvich E.P.
Terentyeva N.A.
Chechelnitsky E.A

During the year Management Board consisted of the following members:

|Until June 30, 2006                                                                                                                                                          |  | Until December 31, 2006                                                                                                                                                      
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Akopov S.L.
Belyaev K.V.
Gaiduk A.A.
Gurevich D.M.
Yerokhin D.Ye.
Isaev A.I.
Kalugin I.A.
Lutsky A.A.
Mironov V.K.
Rysakova G.V.
Sigalov D.V.
Terekhov V.V.
Shlyapnikov A.A. |  | Avdiyants S.P.
Akopov S.L.
Bilibin Y.A.
Gaiduk A.A.
Gerasimov E.V.
Gurevich D.M.
Yerokhin D.Ye.
Isaev A.I.
Klimenko A.Y.
Mironov V.K.
Rysakova G.V.
Terekhov V.V.
Frolov R.A.

In 2006, the total remuneration of the directors and management board members, represented by short-term benefits, amounted to 149
(2005: 131, 2004: 88).

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(g)   Other related party transactions

In 2006, 2005 and 2004 the Group acquired promissory notes of OAO Svyazbank for 4,700, 5,500 and 1,333, respectively, and settled partially the promissory notes
for 9,022, 2,607 and 750, respectively. Net income from sale of promissory notes of OAO Svyazbank amounted to nil (2005: 58, 2004: 12) and was included in interest income in these consolidated
statements of income. Also refer to Notes 12 and 13. As of December 31, 2006, 2005 and 2004 cash held in OAO Svyazbank amounted to 319, 447 and 8, respectively. Certain directors
and managers of the Group and OAO Svyazinvest are directors of OAO Svyazbank.

During
4 months of 2005 and year ended December 31, 2004 the Group acquired promissory notes of OAO Russian Industrial bank (OAO RIB) for 1,271 and 795, respectively, and
settled partially the promissory notes for 1,370 and nil, respectively. Gain from sale of promissory notes of OAO RIB amounted to 6 (2004: nil) and was included in interest income in these
consolidated statement of income. Certain managers of the Group were directors of OAO RIB till April 29, 2005.

The
amounts of revenue and expenses relating to the transactions with other related parties were as follows:

|                               |  | 2006  |   | 2005 |   | 2004 |  
|------------------------------ |  | ----- | - | ---- | - | ---- | -
|Revenue                        |  | 1,087 |   | 150  |   | 35   |  
|Administration and other costs |  | (129  | ) | (31  | ) | (13  | )

The amounts of receivables and payables due from and to such companies were as follows:

|                                      |  | 2006 |   | 2005 |   | 2004 |  
|------------------------------------- |  | ---- | - | ---- | - | ---- | -
|Accounts receivable                   |  | 155  |   | 106  |   | 11   |  
|Accounts payable and accrued expenses |  | (90  | ) | (5   | ) | (2   | )

28.   COMMITMENTS AND CONTINGENCIES

(a)   Legal proceedings

The Group is subject to a number of proceedings arising in the course of the normal conduct of its business (refer to (b) below and Note 17).
Management believes that the ultimate resolution of these matters will not have a material adverse effect on the results of operations or the financial position of the Company or the Group.

(b)   Taxation

Russian tax, currency and customs legislation is subject to varying interpretations and changes occurring frequently. Further, the interpretation of tax
legislation by tax authorities as applied to the transactions and activity of the Group's entities may not coincide with that of management. As a result, tax authorities may challenge transactions and
the Group's entities may be assessed additional taxes, penalties and interest, which can be significant. The periods remain open to review by the tax and

F-61

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customs
authorities with respect to tax liabilities for three calendar years preceding the year of review. Under certain circumstances reviews may cover longer periods.

As
of December 31, 2006 management believes that its interpretation of the relevant legislation is appropriate and that it is probable that the Group's tax, currency and customs
positions will be sustained and, thus, the Group has adequately provided for tax liabilities in the consolidated balance sheet as of December 31, 2006. However, the general risk remains that
relevant authorities could take different position with regard to interpretative issues and the effect could be significant.

As
a result of the comprehensive tax inspection covering the period of 2003, the Federal Tax Service of the Russian Federation assessed 3,474 of additional taxes, including fines and
penalties payable by the Company. The above assessment is based on the vague interpretation of tax legislation, relating in particular to accounting for revenue from traffic rendered and certain VAT
deductions. Similar claims have been laid to the most of the companies of Svyazinvest Group. The Group had similar transactions in 2004 and 2005, therefore, it is possible that in case of
comprehensive tax inspection for these years, the Federal Tax Service of Russian Federation would assess additional taxes, including fines and penalties, with respect to the above issues. It is not
practicable to estimate the amount of unasserted claims that may arise, if any, or the likelihood of any unfavorable outcome. Management believes that the Group's position will be successfully
defended if similar claims are made in respect to 2004 and 2005.

In
April 2007 the Arbitrary Court of Moscow confirmed the Group's tax position, thus the assessment of the Federal Tax Service was rejected. The decision of the Moscow arbitration court
is not final as the Federal Tax Service of the Russian Federation may appeal it in Supreme Arbitrary Court of Russian Federation. Currently, management is not able to determine reliably the amount of
this exposure, if any. Management believes that the tax positions taken by the Group with respect to the above issues are appropriate and the Group has sufficient arguments to successfully defend its
tax positions and prevail in Supreme Arbitrary Court. No amounts related to this issue were accrued by the Group as of December 31, 2006, 2005 and 2004.

(c)   Licenses

Substantially all of the Company's revenues are derived from operations conducted pursuant to licenses granted by the Russian Government. These licenses expire in
various years ranging from 2007 to 2013.

The
Company has renewed all other licenses on a regular basis in the past, and believes that it will be able to renew licenses without additional cost in the normal course of business.
Suspension or termination of the Company's main licenses or any failure to renew any or all of these main licenses could have a material adverse effect on the financial position and operations of
the Group.

(d)   Capital Commitments

As of December 31, 2006, contractual commitments of the Group for the acquisition of property, plant and equipment amounted to 2,915 (2005: 6,220,
2004: 7,283).

F-62

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In
connection with the finance lease agreement referred to above in Note 16, the Group also entered into non-cancellable operating IRU lease agreements for the rent of
its network capacity of a terrestrial fiber-optic cables for the period of 13 years starting at various dates between 2006 and 2008.

Future
minimum rentals receivable, denominated in US Dollars, under non-cancellable operating leases as of December 31, 2006 and 2005 are as follows:

|                                 |  | 2006 |  | 2005
|-------------------------------- |  | ---- |  | ----
|Current portion                  |  | 66   |  | 36  
|Between one to two years         |  | 86   |  | 61  
|Between two to three years       |  | 84   |  | 79  
|Between three to four years      |  | 83   |  | 76  
|Between four to five years       |  | 82   |  | 83  
|Over five years                  |  | 444  |  | 571 
|                                 |  |      |  |     
|Total minimum rental receivables |  | 845  |  | 906 
|                                 |  |      |  |     

29.   CREDIT RISK MANAGEMENT

A portion of the Group's accounts receivable is from the State and other public organizations. Collection of these receivables is influenced by political and
economic factors. Management believes there were no significant unprovided losses relating to these or other receivables as at December 31, 2006.

Financial
instruments that could expose the Group to concentrations of credit risk are mainly trade and other receivables. The credit risk associated with these assets is limited due to
the Group's large customer base and ongoing procedures to monitor the credit worthiness of customers and other debtors.

The
Group deposits available cash with several Russian banks. Deposit insurance is not offered to banks operating in Russia. To manage the credit risk, the Group allocates its available
cash to a variety of Russian banks and management periodically reviews the credit worthiness of the banks in which such deposits are held.

The
new scheme of settlements with subscribers (refer to Note 3) significantly changed the composition of main debtors of the Group. The collectibility of accounts receivable from
a wide range of end subscribers under the new scheme is lower than from IRCs and other local operators under the previous one, effective before 2006. However, the Group did not experience any
significant increase in uncollectible accounts receivable during the year 2006. The average uncollectible level of trade receivables is still less than 0,80,9% of sales.

30.   INTEREST RATE RISK MANAGEMENT

Trade and other receivables and payables are non-interest bearing financial assets and liabilities. Interest rates payable on the Group's loans and
other borrowings are disclosed in Notes 18 and 19.

F-63

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31.   FOREIGN EXCHANGE RISK

In 2006, approximately 8% of the Group's revenues and 14% of the Group's expenses were denominated in currencies other than the Russian ruble. Revenues generated
in foreign currency represent income received from foreign operators, and foreign currency denominated expenses consist primarily of payments to foreign operators for international
long-distance traffic termination. Accounts receivable from foreign operators and accounts payable to foreign operators which are denominated in foreign currencies amounted to
approximately 8% of the Group's total accounts receivable and 18% of the Group's total accounts payable as of December 31, 2006. Borrowings received by the Group during 2006 and outstanding as
of December 31, 2006 amounted to 94% of the Group's total borrowings as of December 31, 2006. Thus the Group is exposed to foreign exchange risk.

The
Group does not have formal arrangements to mitigate foreign exchange risks of the Group's operations.

32.   SUBSEQUENT EVENTS

Dividends for the year ended December 31, 2006

In June 2007 the Group's shareholders authorized dividends of 1,796 for the year ended December 31, 2006.

|                                       |  | Dividends |  | Dividends
per share,
Rbl
|-------------------------------------- |  | --------- |  | ------------------------
|Ordinary Shares, Rbl 0.0025 par value  |  | 1,078     |  | 1.4790                  
|Preferred Shares, Rbl 0.0025 par value |  | 718       |  | 2.9589                  
|                                       |  |           |  |                         
|Total                                  |  | 1,796     |  |                         
|                                       |  |           |  |                         

Change in tax regulation on VAT refund

The practice of netting out of the mutual settlements with its counterparties is currently used by the Group. In July 2005 changes in Russian tax legislation were
adopted. Under new rules, effective from January 1, 2007, companies shall abandon settlements netting and make reciprocal cash transfers to be able to refund VAT.

The
Group widely used the netting out of its settlements with IRC before December 31, 2006. Hence, the new rules require the Group to have more cash to meet its current
liabilities. However, Management does not expect a significant adverse effect on the Group's financial position due to the above rules.

F-64

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Investments in Golden Telecom

Golden Telecom, one of the investees of the Group (refer to Note 10), declared its plans for additional share issue. Under current Russian legislation,
existing shareholders have the priority in their right to buy additional shares within new issues proportionately to their current share.

In
April 2007 the Board of Directors of the Group decided to keep its current share in Golden Telecom. As of June 2007, the Group can not reliably estimate the amount of future cash
payment that would be required to buy its share in new issue.

33.   DIFFERENCES BETWEEN INTERNATIONAL FINANCIAL REPORTING STANDARDS AND ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN THE UNITED STATES

The Group's consolidated financial statements are prepared in accordance with International Financial Reporting Standards ("IFRS") which differ in certain
respects from accounting principles generally accepted in the United States of America ("US GAAP").

The
principal differences between IFRS and US GAAP are presented below together with explanations of certain adjustments that affect total shareholders' equity as of
December 31, 2006, 2005 and 2004 and net income (loss) for the years ended December 31, 2006, 2005 and 2004.

Reconciliation of net income

|                                                                 |  | 2006   |   | 2005   |   | 2004  |  
|---------------------------------------------------------------- |  | ------ | - | ------ | - | ----- | -
|Profit for the period reported under IFRS                        |  | 1,456  |   | 978    |   | 4,266 |  
|Minority interest (b)                                            |  | 2      |   |       |   |      |  
|Impairment loss (c)                                              |  |       |   | 4,970  |   |      |  
|Depreciation on reversed impairment charge (c)                   |  | (1,562 | ) | (628   | ) | (697  | )
|Impact of goodwill amortization (d)                              |  |       |   |       |   | 135   |  
|Impact of difference in accounting for GlobalTel acquisition (f) |  |       |   | (826   | ) |      |  
|Deferred tax effects of US GAAP adjustments                      |  | 375    |   | (1,042 | ) | 167   |  
|                                                                 |  |        |   |        |   |       |  
|Total                                                            |  | (1,185 | ) | 2,474  |   | (395  | )
|                                                                 |  |        |   |        |   |       |  
|Net income under US GAAP                                         |  | 271    |   | 3,452  |   | 3,871 |  
|                                                                 |  |        |   |        |   |       |  

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Earnings per share

|           |  | 2006 |  | 2005  |  | 2004 
|---------- |  | ---- |  | ----- |  | -----
|Net income |  | 271  |  | 3,452 |  | 3,871
|           |  |      |  |       |  |      

|                                              |  | Preferred shares |  | Ordinary shares |  | Preferred shares |  | Ordinary shares |  | Preferred shares |  | Ordinary shares
|--------------------------------------------- |  | ---------------- |  | --------------- |  | ---------------- |  | --------------- |  | ---------------- |  | ---------------
|Weighted average number of shares outstanding |  | 242,831,469      |  | 728,696,320     |  | 242,831,469      |  | 728,696,320     |  | 242,831,469      |  | 728,696,320    
|                                              |  |                  |  |                 |  |                  |  |                 |  |                  |  |                
|Earnings per share                            |  | 0.28             |  | 0.28            |  | 3.55             |  | 3.55            |  | 3.98             |  | 3.98           
|                                              |  |                  |  |                 |  |                  |  |                 |  |                  |  |                

Basic and diluted earnings per share are the same for all periods presented, as there are no potentially dilutive instruments.

Reconciliation of shareholders' equity

|                                         |                                                                          | 2006   |       | 2005   |        | 2004   |      
|---------------------------------------- | ------------------------------------------------------------------------ | ------ | ----- | ------ | ------ | ------ | -----
|Total shareholders' equity under IFRS    |                                                                          | 50,945 |       | 49,697 |        | 50,838 |      
|US GAAP adjustments:                     |                                                                          |        |       |        |        |        |      
|                                         | Pension expense and obligations (a)                                      |        | (102  | )      |       |        |     
|                                         | Minority interest (b)                                                    |        | (25   | )      |       |        |     
|                                         | Impairment of property, plant and equipment (c)                          |        |      |        | 4,970  |        |     
|                                         | Reversal of impairment of property, plant and equipment and goodwill (c) |        | 4,216 |        | 808    |        | 1,436
|                                         | Impact of goodwill amortization (d)                                      |        | 262   |        | 262    |        | 262  
|                                         | Partial gain recognition, net of tax (e)                                 |        | (3    | )      | (3     | )      | (3   
|                                         | Deferred tax effects of US GAAP adjustments                              |        | (987  | )      | (1,386 | )      | (344 
|                                         |                                                                          |        |       |        |        |        |      
|Total                                    |                                                                          | 3,361  |       | 4,651  |        | 1,351  |      
|                                         |                                                                          |        |       |        |        |        |      
|Total shareholders' equity under US GAAP |                                                                          | 54,306 |       | 54,348 |        | 52,189 |      
|                                         |                                                                          |        |       |        |        |        |      

(a)   Pension expense and obligations

On December 31, 2006, the Group adopted the recognition and disclosure provisions of FASB Statement No. 158, Employers' Accounting of Defined
Benefit Pension and Other Postretirement Plans, an amendment to FASB statements No 87, 88, 106, and 132 (R). Statement 158 required the Group to recognize the funded status of its pension plan in the
statement of financial position as of December 31, 2006, with a corresponding adjustment to accumulated other comprehensive income, net of tax. The adjustment to accumulated other comprehensive
income represents unrecognized prior service costs, which were previously netted off against the plan's funded status in the Group's consolidated balance sheet pursuant to the provisions of Statement
87. These amounts will be

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subsequently
recognized as net periodic pension cost pursuant to the Group's historical accounting policy for amortizing such amounts.

The
incremental effects of adopting the provisions of Statement 158 on the Group's statement of financial position as of December 31, 2006 are presented in the following table.
The adoption of Statement 158 had no effect on the Group's consolidated statement of income for the year ended December 31, 2006, or for any prior period presented, and it will not effect the
Group's operating results in future periods.

|                                       |  | At December 31, 2006 | 
|-------------------------------------- |  | -------------------- | 
|
|Defined benefit obligation             |  | 175                  | 
|Deferred tax asset                     |  |                     | 
|                                       |  |                      | 
|Total liabilities                      |  | 175                  | 
|                                       |  |                      | 
|Accumulated other comprehensive income |  |                     | 
|                                       |  |                      | 
|Total shareholders' equity             |  |                     | 
|                                       |  |                      | 

(b)   Minority interest

In accordance with revised IAS No.1 "Presentation of Financial Statements", effective for financial statements issued for annual periods beginning on or after
January 1, 2005, minority interest is included in total net income.

Under
US GAAP, minority interest is deducted from net income and net income represents profit or loss attributable to equity holders.

(c)   Impairment on property, plant and equipment and goodwill

In 2005 the Group recognized an impairment loss of 4,970 related to write-down of certain property, plant and equipment of 4,961 and goodwill of 9 to
their recoverable amount (refer to Notes 6 and 7). The impairment loss was calculated based on the present value of estimated future cash flows from the continued use of assets using a
discount rate of 16.65%.

Under
US GAAP, SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets", requires an initial assessment of impairment based on
undiscounted cash flows whenever there is an indication that impairment may exist. Due to the fact the sum of undiscounted expected future cash flows was in excess of the carrying amount of the
Group's property, plant and equipment as of December 31, 2005, an impairment loss was not recognized for US GAAP reporting purposes.

Also,
in 1998 the Group recognized an impairment loss of 8,699 on its property, plant and equipment other than construction in progress. The impairment loss was calculated based on the
present value of estimated future cash flows from the continued use of the assets using a real-terms

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(inflation
adjusted) discount rate of 20%. No impairment loss was recognized for US GAAP reporting purposes.

Since
no impairment loss was recognized under US GAAP in 1998 and 2005, a different asset base is to be used to compute US GAAP depreciation expense, loss on disposal of
property, plant and equipment and the related deferred tax liability commencing 1999.

Deferred
tax effect was computed using tax rate of 24%.

(d)   Accounting for investments in associates

Before IFRS No. 3 "Business combinations" was adopted, the Group amortized goodwill acquired in business combinations. As described in Note 9,
during 2002, the Group acquired 15% of voting stock of Golden Telecom, Inc. In the opinion of management, the Group exercised significant influence over financial and operating policies of
Golden Telecom. Therefore, in accordance with IAS No.28, "Accounting for Investments in Associates" effective for the year ended December 31, 2004, the Group amortized the equity method
goodwill related to its investment in Golden Telecom over its estimated useful life of 8 years. During 2004 the equity method goodwill related to investment in Golden Telecom recognized in IFRS
accounts amounted to 135.

Effective
January 1, 2005, IFRS No.3 "Business combinations" prohibited amortization of goodwill and required to test it for impairment annually.

In
accordance with SFAS No. 142, "Goodwill and Other Intangible Assets", goodwill is not amortized and is subject to annual impairment tests in accordance with SFAS
No. 142. The Group performed the annual impairment test in respect to recoverability of the carrying amount of goodwill at December 31, 2006, 2005 and 2004 by comparing the fair value to
the carrying amount for both IFRS and US GAAP purposes. The fair value exceeded the carrying amount.

(e)   Partial gain recognition

During 2002 the Group completed a sale of its 50% interest in EDN Sovintel to Golden Telecom in exchange for a cash payment of US$ 10 million,
no-interest bearing US$ 46 million promissory note and 15% of then outstanding ordinary shares of Golden Telecom.

In
connection with this transaction, in its IFRS accounts, the Group recognized a gain of 1,733, which represented a difference between fair value of the total consideration received and
the carrying amount of the investment in EDN Sovintel as of the date of sale, net of direct costs associated with the transaction. Before the sale to Golden Telecom, the Group accounted for its
investment in EDN Sovintel using equity method.

In
its US GAAP accounts, in accordance with requirements of Emerging Issues Task Force Issue No. 01-02, "Interpretations of APB 29", the Group recognized
a gain of 1,730. The difference of 3 between the amount of gain recognized under IFRS and US GAAP pertains to a portion of the gain represented by the economic interest retained by
the Group.

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(f)    Accounting for acquisition of GlobalTel

As described in Note 5, in 2005 the Group obtained control over GlobalTel. The obtaining control over GlobalTel was accounted for using the purchase
method, in accordance with provisions of IFRS No. 3 "Business combinations". The Group recognized its share in accumulated deficit of GlobalTel of 826 directly in equity.

For
US GAAP purposes prior to obtaining control over GlobalTel on April 25, 2005, the Group accounted for its investments in GlobalTel under equity method. Since GlobalTel
incurred substantial losses from inception and had negative equity, the Group reduced its investment in GlobalTel to 0 and suspended recognition of further equity method losses. Upon obtaining control
over GlobalTel, in accordance with transition provisions of EITF 96-16 "Investor's Accounting for an Investee when the Investor has a Majority of the Voting Interest but the
Minority has Certain Approval or Veto Rights" the Group consolidated GlobalTel on April 25, 2005. Upon consolidation, assets and liabilities of GlobalTel were recorded at their carrying values
as of that date and the Group recorded a charge of 826 for the cumulative losses previously not recorded. The following table summarizes the
effect of consolidation of GlobalTel on April 25, 2005 on the consolidated financial statements of the Group:

|                                    |  | April 25, 2005 |  
|----------------------------------- |  | -------------- | -
|Property, plant and equipment       |  | 357            |  
|Inventories                         |  | 191            |  
|Trade and other accounts receivable |  | 37             |  
|Other current assets                |  | 161            |  
|Cash                                |  | 138            |  
|Short-term debt (Loral)             |  | (219           | )
|Vendor financing (Globalstar)       |  | (1,206         | )
|Lease liabilities                   |  | (86            | )
|Other current liabilities           |  | (199           | )
|Cumulative effect adjustment        |  | 826            |  
|                                    |  |                |  
|                                    |  |               |  
|                                    |  |                |  

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Investments in associates

Summarized financial information for 2005 and 2004 of the Group's significant equity method investee, Golden Telecom, was as follows (translated into Rubles using
exchange rate as of December 31, 2005 and 2004, respectively):

|                               |                         | 2005 |        | 2004
|------------------------------ | ----------------------- | ---- | ------ | ----
|Income statement information   |                         |      |        |     
|                               | Revenues                |      | 19,209 |     
|                               | Operating income        |      | 3,337  |     
|                               | Net income              |      | 2,190  |     
|Financial position information |                         |      |        |     
|                               | Current assets          |      | 6,072  |     
|                               | Non-current assets      |      | 19,320 |     
|                               | Current liabilities     |      | 3,796  |     
|                               | Non-current liabilities |      | 1,598  |     
|                               | Net assets              |      | 19,431 |     

In December 2005 the Group lost significant influence over Golden Telecom (refer to Notes 9 and 10), discontinued applying equity
method of accounting for this investment and reclassified it as available-for-sale financial asset. The Group had no material investees to disclose their separate financial
statements in 2006.

New US GAAP standards adopted in 2006

In September 2006, the SEC staff issued Staff Accounting Bulletin No. 108 (SAB 108) Considering the Effects of Prior Year Misstatements when
Quantifying Misstatements in Current Year Financial Statements. SAB 108 eliminates the diversity of practice surrounding how public companies quantify financial statement misstatements. It
establishes an approach that requires quantification of financial statement misstatements based on the effects of the misstatements on each of the Company's financial statements and the related
financial statement disclosures. SAB 108 must be applied to annual financial statements for their first fiscal year ending after November 15, 2006. The adoption of the provisions of
SAB 108 did not have a material impact on the Group's results of operations or financial position.

New US GAAP standards not yet adopted in 2006

In July 2006, the FASB issued FASB Interpretation No. 48 (FIN 48) Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement
No. 109, Accounting for Income Taxes. FIN 48 clarifies the accounting for income taxes by prescribing the minimum recognition threshold a tax position is required to meet before
being recognized in the financial statements. FIN 48 also provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and
transition. In addition, FIN 48 excludes from the scope income taxes from

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SFAS No. 5,
Accounting for Contingencies. FIN 48 is effective for fiscal years beginning after December 15, 2006; however, early adoption is allowed. The Group is
going to adopt FIN 48 for the fiscal year 2007. The impact of the implementation of FIN 48 is to be recognized as a change in the opening balance of retained earnings as of
January 1, 2007. Management is still in process of implementing relevant control procedures for FIN 48 application.

In
September 2006, the FASB issued FASB statement No. 157 (SFAS No. 157), Fair Value Measurements. The standard provides guidance for using fair value to measure assets and
liabilities. The standard applies whenever other standards require (or permit) assets or liabilities to be measured at fair value. The standard does not expand the use of fair value in any new
circumstances. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007. Management does not believe that the impact of adopting SFAS No. 157 will have
a material impact on the Group's results of operations or financial position.

In
February 2007, the FASB issued FASB statement No. 159 (SFAS No. 159), The Fair Value Option for Financial Assets or Financial Liabilities. The standard permits entities
to choose to measure many financial instruments and certain other items at fair value. The statement is expected to expand the use of fair value measurement. SFAS No. 159 shall be effective as
of the beginning of each reporting entity's first fiscal year that begins after November 15, 2007 but earlier adoption is allowed under certain conditions. The impact of adopting SFAS
No. 159 is not expected to have a material impact on the results of operations or financial position of the Group.

In
June 2006, the Emerging Issues Task Force reached a consensus on EITF Issue No. 06-03 (EITF No. 06-03), "How Taxes Collected from Customers and
Remitted to Governmental Authorities Should Be Presented in the Income Statement (That Is, Gross versus Net Presentation)". EITF No. 06-03 provides that the presentation of taxes
assessed by a governmental authority that is directly imposed on a revenue-producing transaction between a seller and a customer on either a gross basis (included in revenues and costs) or on a net
basis (excluded from revenues) is an accounting policy decision that should be disclosed. The provisions of EITF No. 06-03 become effective for fiscal years beginning after
December 15, 2006. The adoption of EITF No. 06-03 is not expected to have a material effect on the Group's consolidated financial position or results of operations.

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Consolidated
statements of changes in shareholders' equity and comprehensive income under US GAAP for the years ended December 31, 2006, 2005 and 2004 are
as follows:

|                                |                                                                  | Common shares |   | Preferred shares |   |             |   |    |   |        |      
|------------------------------- | ---------------------------------------------------------------- | ------------- | - | ---------------- | - | ----------- | - | -- | - | ------ | -----
|
|
|Balance as of January 1, 2004   |                                                                  | 728,696,320   |   | 75               |   | 242,831,469 |   | 25 |   | 49,253 |      
|                                |                                                                  |               |   |                  |   |             |   |    |   |        |      
|Comprehensive income            |                                                                  |               |   |                  |   |             |   |    |   |        |      
|                                | Net income                                                       |               |  |                  |  |             |  |    |  |        | 3,871
|                                | Net change in unrealized gain on available-for-sale investments  |               |  |                  |  |             |  |    |  |        |     
|                                |                                                                  |               |   |                  |   |             |   |    |   |        |      
|Total comprehensive income      |                                                                  |              |   |                 |   |            |   |   |   | 3,871  |      
|Dividends for 2003              |                                                                  |              |   |                 |   |            |   |   |   | (1,430 | )    
|                                |                                                                  |               |   |                  |   |             |   |    |   |        |      
|Balance as of December 31, 2004 |                                                                  | 728,696,320   |   | 75               |   | 242,831,469 |   | 25 |   | 51,694 |      
|                                |                                                                  |               |   |                  |   |             |   |    |   |        |      
|Comprehensive income            |                                                                  |               |   |                  |   |             |   |    |   |        |      
|                                | Net income                                                       |               |  |                  |  |             |  |    |  |        | 3,452
|                                | Net change in unrealized gain on available-for-sale investments  |               |  |                  |  |             |  |    |  |        | 262  
|                                |                                                                  |               |   |                  |   |             |   |    |   |        |      
|Total comprehensive income      |                                                                  |              |   |                 |   |            |   |   |   | 3,714  |      
|Dividends for 2004              |                                                                  |              |   |                 |   |            |   |   |   | (1,786 | )    
|                                |                                                                  |               |   |                  |   |             |   |    |   |        |      
|Balance as of December 31, 2005 |                                                                  | 728,696,320   |   | 75               |   | 242,831,469 |   | 25 |   | 53,622 |      
|                                |                                                                  |               |   |                  |   |             |   |    |   |        |      
|Comprehensive income            |                                                                  |               |   |                  |   |             |   |    |   |        |      
|                                | Net income                                                       |               |  |                  |  |             |  |    |  |        | 271  
|                                | Net change in unrealized gain on available-for-sale investments  |               |  |                  |  |             |  |    |  |        |     
|                                | Adjustment to initially apply FASB Statement No. 158, net of tax |               |  |                  |  |             |  |    |  |        |     
|                                |                                                                  |               |   |                  |   |             |   |    |   |        |      
|Total comprehensive income      |                                                                  |              |   |                 |   |            |   |   |   | 271    |      
|Dividends for 2005              |                                                                  |              |   |                 |   |            |   |   |   | (2,041 | )    
|                                |                                                                  |               |   |                  |   |             |   |    |   |        |      
|Balance as of December 31, 2006 |                                                                  | 728,696,320   |   | 75               |   | 242,831,469 |   | 25 |   | 51,852 |      
|                                |                                                                  |               |   |                  |   |             |   |    |   |        |      

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