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Mobile TeleSystems OJSC (NYSE:MBT)

Q3 2007 Earnings Call

November 20, 2007, 10:00 AM ET

Executives

Andrei Terebenin - VP of Corporate Communication

Leonid Melamed - President and CEO

Vsevolod Rozanov - VP and CFO

Mikhail Shamolin - VP, Director of Business Unit MTS Russia

Pavel Pavlovsky - VP, Director of Business Unit MTS Ukraine

Analysts

Alexander Kazbegi - Renaissance Capital

William Kirby - Nevsky Capital

Sergei Arsenyev - Goldman Sachs

Herve Drouet - HSBC

Nadejda Golubeva - Aton

Olga Bystrova - CSFB

Andrei Bogdanov - Troika Dialog

Stephen Pettyfer - Merrill Lynch

Alexander Vislykh - Morgan Stanley

Alex Kuznetsov - Bear Stearns

Taras Shumelda - American Century Investment Management

Alexei Yakovitsky - Deutsche Bank/UFG

Presentation

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Mobile TeleSystems Third Quarter 2007 Financial and Operating Results Conference Call on Tuesday, the 20th of November 2007. Throughout today's recorded presentation, all participants will be in a listen-only mode. After the presentation, there will be an opportunity to ask questions. [Operator Instructions]. I will now hand the conference over to Mr. Andrei Terebenin, please go ahead, sir.

Andrei Terebenin - Vice President of Corporate Communication

Good day, ladies and gentlemen, and welcome to MTS conference call to discuss the company's third quarter 2007 financial operating results. Before beginning our discussion, I would like to remind everyone that expect for historical information, comments made during this call may constitute forward-looking statements, which may involve certain risks. These statements may relate to one of the following issues. The strategic development of MTS business activities both in Russia and abroad; revenue and/or subscriber growth; syndicated loan facilities and their usage; legal actions or proceedings directed at the company or its representatives; regulatory changes and their impact on the company operations in the markets in which we operate; financial indicators such as operating income before depreciation, amortization, average revenue for user, cash flow projections and/or return on invested capital; technical matters as they pertain to our mobile communication network, including equipment, licensing or network technologies; and capital expenditures and operating expenses.

Important factors could cause actual results to differ materially from those contained in our projections or forward-looking statements. These statements may include company press releases, earnings presentation, MTS annual report, and Form 20-F, as well as other public filings made by the company with the United States Securities and Exchange Commission, all of which are available on the company website or on U.S. Securities and Exchange Commission website. MTS disavows any obligation to update any previously made forward-looking statements uttered on this conference call or make any adjustments to previously made statements to reflect changes in risks. Copies of the presentation materials used in references in this conference call are available on our company website.

I'll now turn the call over to Leonid Melamed, President and Chief Executive Officer of MTS Group.

Leonid Melamed - President and Chief Executive Officer

Thank you Andrei. Ladies and gentlemen, thank you for joining our 2007 third quarter conference call. Joining today... joining me today are my dear colleagues Mr. Vsevolod Rozanov, Chief Financial Officer; Mr. Mikhail Shamolin, Head of Business Unit, MTS Russia; and Mr. Pavel Pavlovsky, Head of Business Unit MTS Ukraine.

In the period we have continued to execute on our 3+2 strategy, which we explained to you over our last call. Judging by our results, I am pleased to say that we continue to fulfill the commitments that we have made to, the first, capture growth in our core markets; second, create value in developing markets; third, develop mobile broadband in our markets of operations while at the same time and forth therefore [ph] maintaining cost efficiency and further developing our growth.

We again generated strong profitable growth in each of our operating regions. We also welcomed an additional market to MTS Group. The first time MTS exceeded the $2 billion mark for revenue in the quarter. Group revenue reached US$2.2 billion, a 13% rise over Q2 and a nearly 23% rise from Q3 of 2006.

In our core markets, our Russian operations continued to drive the Group in absolute growth, as Russian revenues rose to US$1.6 billion, a 13% increase Q-on-Q and a 26% jump from the same period in 2006. Internal growth has been a sustained increase in voice usage. The introduction of tariffs plans like super Pervyi and campaigns like our triple bonus promotion continued trends we've long been seeing. Our Russian customers would talk more assuming they are presented with right value proposition. An added bonus has been the recent increase of over 1.7 million net subscribers for the period, perhaps an indication that there is still some subscriber growth available in our market. Seasonal drivers too like roaming and a greater number of calendar days also factored into this growth.

In Ukraine, revenues rose 12% quarter-on-quarter to US$439 million. Seasonal factors such as roaming largely contributed to this rise. As we have stated numerous times on this call, we are moving forward with a long-term strategy to leverage different value triggers in the market. As part of this overall effort, we initiated our re-branding in the beginning of July. Now its success will be measured further down the road, the initial responses for our re-branding were positive.

Our brand values resonate well in those areas where we have a strong market presence and those where we are building share. At the same time, we're seeing across the broad improvements in perceptions about the quality of our network and scope of our products and services. The result has been higher than expected connections, which we will only offset by high amount of churn stemming from our last year's holiday period.

On a related note, we introduced BlackBerry service in Ukraine, the first operator to do so in the CIS. Now we are offering enterprise solutions to our customer clients and we are evaluating the market for internet solutions for individual customers. Now it is too early to comment on any trends, we are so far pleased with the pace of adoption. We also launched our CDMA-450 high-speed data network in October in Kiev and [indiscernible]. This will be another value driver that will fuel and support future growth.

In Uzbekistan and Turkmenistan, our less developed markets, we continue to rollout our network and strengthen our customer bases. Revenues from Uzbekistan rose 15% Q-on-Q and subscribers reached nearly 2.3 million. Our introduction of tariff plan RED leveraging the same drivers that made it successful in Russia last year has been one factor that has driven customer growth. Penetration in the market remains low at less than 16%. In Turkmenistan, which remains roughly 6% penetrated, revenues grew 10% Q-on-Q as more subscribers joined our network.

Now Vsevolod will discuss our financial position. Please.

Vsevolod Rozanov - Vice President and Chief Financial Officer

Thank you Leonid. I am pleased to report that the company is in as strong a financial position as it has ever been. For the period, OIBDA for the Group rose 15% quarter-on-quarter, again outpacing our strong growth in revenue, and 22% year-over-year. This resulted in the 53% OIBDA margin for the Group.

Growth in Russia was again a key driver of our... as our improvements were made last year in our efficiency continue to enhance overall profitability. Though seasonality in Q3 provides the highest margins, spending in Ukraine related to our re-branding resulted in a slight decrease in our margin. Regardless, we still realized a 50% margin in this challenging competitive environment. Our operations in Uzbekistan and Turkmenistan continue to show high levels of profitability, with OIBDA margins exceeding 60%.

On the bottom line, we see continued growth. Net income rose 29% quarter-on-quarter to nearly $655 million, yielding a 29.5% margin. Though small gains were realized through for example our Uzdunrobita consolidation and the slight decline in interest payments relative to our revenue growth, the growth can be more or less attributed the growth in the OIBDA for the Group and the continuing financial control and management. In addition, ruble appreciation versus the U.S. dollar of approximately 3.4% in Q3 positively impacted our net income by around $80 million.

Moving on to the balance sheet, I would like to make few remarks on the company's liquidity and use of cash during the past quarter. Our net debt-to-OIBDA ratio increased in Q3 from 0.6... to 0.6% from 0.5% at the end the Q2. This is primarily driven by the decrease in our cash position by $330 million. As of today, we have practically finished paying out dividends in the amount of US$741 million approved by our shareholders for the fiscal year 2006.

We also continued with ADR repurchase program within Q3. We spent approximately $81 million to acquire our ADRs on the market. Having said this, the company now remains underleveraged, particularly if you consider that free cash flow for the year-to-date has remained positive and reached $1 billion. This hypothetically could allow us to increase our borrowings in the event that it should be necessary. Regardless, the company is in the strong position to meet its future capital needs and ready to meet any operational challenge our markets may present.

Now I would like to pass it over back to Leonid.

Leonid Melamed - President and Chief Executive Officer

Thank you, Vsevolod. As I mentioned before, we welcomed the new markets to the MTS Group. In September, we acquired an 80% stake K-Telecom, Armenia's leading mobile operator. Operating under the VivaCell brand, K-Telecom now brought over 1 million subscribers and commands a 67% market share. Launched service in 2005, it now possesses nearly full preparation [ph] coverage of a market that is roughly 50% penetrated.

As part of our arrangement with K-Telecom shareholders, we will continue to benefit from their involvement in running MTS operations in the market. Local management has agreed to remain in place as the team has proven its know-how to build the winner in this environment. In the meanwhile, we will collectively work to integrate Armenia into the Group operations, leveraging Group synergies to, for example, introduce new and exciting products and leverage our scale to bring better roaming rates to our Armenian customers.

Because the acquisition was made late in the quarter, there won't be too many revealing financial and operational indicators until Q4 results. However, the Armenian market affords MTS the same advantages we think to exploit in our other markets -- one, a strong market leader in a solid asset base; two, sustained revenue growth in a rapidly developing economy; and three, profitability at levels similar to other markets throughout the Group.

As part of our commitment to mobile broadband in the CIS, we are moving forward with our deployment plans both in Russia and abroad. As we have announced publicly, we have selected Nokia, Siemens, and Ericsson as global equipment vendors for Russia. Planning continues on the country-by-country basis.

In Russia, our deployment is ongoing. We are moving forward with site selection and enhancement to core network. In the fall, at InfoCom, a leading trade show here in Moscow, we demonstrated our 3G capabilities on the live network. Video conferencing and data transfer at 3 megabits per second HSDPA transfer speed. This was a truly exciting moment and the sure sign of the technology's future potential. However, we continue to encounter barriers in terms of spectrum clearance in Moscow and other regions. Nevertheless, we still aim for a commercial launch of key areas of Russia over the course of the next year.

In Uzbekistan, we have above [ph] 18 vendor options and beginning our 3G planning. Likewise in Armenia, we will receive the necessary radio frequencies to begin offering 3G services. Planning and evaluation should begin Q1 2008.

Ladies and gentlemen, thank you for your time. And now I am happy to open the call for your questions.

Question And Answer

Operator

Thank you, sir. [Operator Instructions]. Our first question comes from the Ms. Leila Govi [ph]. Please state your company name followed by your question.

Unidentified Analyst

Hi, this is Leila Govi [ph] from Egerton. I have a couple questions. The first one is if you could just please reiterate again what CapEx you are looking for for the full year this year and also next year, so this year if it's still around $2 billion. The second question is on page 14 of your presentation, you referred to the proportion of lower ARPU customers as a percentage of your total subscriber base. Could you tell us what they represent in terms of your total revenues for Russia? The third question I have is you referred to Ukraine margin hit from the introduction of the CDMA-450 network rollout. Could you just say how much that hurts your margins by this quarter? And sorry, if I can ask one last question, which is just in terms of the ARPU growth in Russia that we saw this quarter, looking on a year-on-year basis, is it fair to say that this represents a more underlying like-for-like trend or is there still contributions from things like call set up, because this was introduced partially in Q3 last year? Thank you.

Leonid Melamed - President and Chief Executive Officer

Thank you Leila. So, let me... Leonid Melamed. Let me answer the first question. We are not in a position now to change our guidance on CapEx expenditures for the year 2007 and we keep on... our focus on $2 billion expenditures including expenditures for 3G. For 2008, we are presently not in the position to give a guidance at least for the time being.

To answer the second question, we have sort of... there are two issues. One issue is a low ARPU customers, one can say the customers in our pre-paid segment. Our pre-paid segment... in Russia among the customers is up to... customer base is up to 90% for the time being. So there is a significant difference in ARPU between post-paid and pre-paid and that's what you see from the documents that is... from the presentation that's been distributed. So, the ARPU for pre-paid is like almost five times lower than the ARPU for the post-paid. CDMA-450 in Ukraine, we've just launched the services in Q3. That's why it has had no impact on our margin in Ukraine in Q3. And on the fourth question, I would ask Mikhail to comment.

Mikhail Shamolin - Vice President, Director of Business Unit MTS Russia

This is Mikhail Shamolin. Hello. If you can just repeat what ARPU trend are you interested in?

Unidentified Analyst

Russian ARPU growth that we see year-on-year because we're now reaching the anniversary for many of the measures that were introduced from Q3 last year. I was just wondering if you look at this growth as a real underlying growth of the business, or is it still affected by some of the measures that were introduced after calling party pays came into place in Q3 last year?

Mikhail Shamolin - Vice President, Director of Business Unit MTS Russia

Well, I think the purest ARPU growth effect you will see in Q4 because Q4 would be almost 500% comparable with the full CPP effect accounted for. But Q3 I think is also pretty good approximation given that CPP has been introduced as of July 1, 2006. So, when you look at the difference between 8.5 and 10, I think that that pretty much reflects the trend that has been established.

Unidentified Analyst

Okay. And sorry, just a follow-up regarding that Ukraine question about the CDMA, the reason I ask this is because on page 30 of the presentation you said there was an impact on the OIBDA from this introduction and since the sales and marketing spend in Ukraine was roughly... as a percentage of sales was roughly similar to what we saw last quarter, then it does make me think that there is something in the pre-SAC costs, i.e., the CDMA issue, which affected the margins. But you are saying in fact there is really no impact. Is that right?

Leonid Melamed - President and Chief Executive Officer

That is right, exactly.

Unidentified Analyst

Okay. And sorry one last thing was just again on the page 14, my question was actually were you sure that these customers are 66% of your total customer base? Can you say what they represent of your total revenues, the customers who have ARPU up to $10?

Leonid Melamed - President and Chief Executive Officer

We are not prepared to give you this data right now, but I believe it could be real [indiscernible], we only comment on the post-paid and pre-paid ARPU of our customers.

Unidentified Analyst

Okay, thank you very much.

Leonid Melamed - President and Chief Executive Officer

Thank you.

Operator

Our next question comes from Mr. Alex Kazbegi. Please state your company name followed by your question.

Alexander Kazbegi - Renaissance Capital

Yes, good evening, it's Alex from Renaissance. The first question I had was about your debt breakdown by currency because obviously there was a quite a large impact from the ruble appreciation. I was wondering if you can give us the break-down by currency, which exists now?

Secondly, on Ukraine, again clearly very good trend on the ARPU and underlying tariffs. I was wondering if you see any differences with the introduction of the Ukrtelecom in the market and whether you can comment generally on the trends currently in the Q4 specifically in Ukraine and Russia as well?

And lastly, just wanted also to clarify on 3G, as far as I remember, the launch in Moscow and St. Petersburg was scheduled for the first half of the year. Is that still the case or due to this frequency cleanup it's going to be probably postponed towards the second half of the year? Thank you.

Vsevolod Rozanov - Vice President and Chief Financial Officer

Well, the first question will be taken by myself, it's Vsevolod. The breakdown done by currencies is fairly simple. At this stage we have more than 98% of the debt in US dollars. We have remained in portion in various currencies, but mostly euro, also some currencies of the manufacturers, producers, but it's almost more than 98% is dollars.

Alexander Kazbegi - Renaissance Capital

Okay.

Pavel Pavlovsky - Vice President, Director of Business Unit MTS Ukraine

Alex, this is Pavel Pavlovsky, the Head of MTS Ukraine. Thanks for the question. So we... so far we haven't seen any impact of UTEL, there is no advertising on TV and their pricing offers we didn't find very aggressive. So basically we don't feel any impact. Taking about ARPU and usage trends... all the tariffs we introduced under the re-branding the new tariff system is aimed at stimulating the usage because we have a so called regressive tariffs that consequent minutes a bit lower priced than the previous one, and going down to three free Ukrainian kopiyok, which is a good price. So we saw in September that this has basically had a positive impact on our ARPU and basically from a lower price the usage is growing and we are right now promoting immigrations. We see a usage pickup, while it's a bit slow, but yet the trend is positive. Thank you.

Alexander Kazbegi - Renaissance Capital

Thank you.

Mikhail Shamolin - Vice President, Director of Business Unit MTS Russia

Alex, on Russia, I believe you had the same question about the market competitive dynamics and the APPM, right?

Alexander Kazbegi - Renaissance Capital

No, on the Russia.

Mikhail Shamolin - Vice President, Director of Business Unit MTS Russia

Yes, Alex so, in Russian market, the competitive dynamics in the first quarter, we are not seeing that they are changing significantly compared to the third quarter and the competition is mostly around the dual-channel and the sales push rather than the price competition.

Alexander Kazbegi - Renaissance Capital

Thank you.

Mikhail Shamolin - Vice President, Director of Business Unit MTS Russia

And also on the 3G in Russia, in Moscow the frequency issue is very much a serious one and right now there is no clarity as to when the frequency spectrum is going to be cleared because it has to do with physical removal of certain military sites to another location. And in St. Petersburg, yes, we do expect 3G to appear in the first half of 2008.

Alexander Kazbegi - Renaissance Capital

Okay, perfect. Thank you very much.

Operator

Our next question comes from Mr. William Kirby. Please state your company name, followed by your question.

William Kirby - Nevsky Capital

William Kirby, Nevsky Capital. I have two questions. Firstly on the competitive environment in Russia, how long are you planning to continue running your existing promotions and are you concerned that's all about retaliation from the competition? Secondly, we saw a low effective tax rate in Q3, what should we be expecting for the rest of 2007 and future years? Thank you.

Mikhail Shamolin - Vice President, Director of Business Unit MTS Russia

Okay. On... this is Mikhail Shamolin answering. On the first one, we do have some promotions, but we do not see those promotions as being super-aggressive as they are related to the overall APPM level in the market. Mostly they are focused around decreasing price and promoting price points to stimulate usage and mostly it's in the third and other minutes. And therefore we regulate the APPM level with the price of first minute if we are talking about tariff plan super Pervyi and other marketing initiatives are basically within this line. So, we are trying to segment the offers and make them user-specific, but hold the APPM within the levels which we have established for ourselves. We actually do have a pretty strict price control and we manage both APPM and the MOU sides of business. So, the answer to your question is, no, we don't see any major retaliation from the activities that we currently have.

William Kirby - Nevsky Capital

Okay. Thank you.

Vsevolod Rozanov - Vice President and Chief Financial Officer

And on the second question, we think that the effective tax rate which we saw in the Q3 is the one which we can use as a proxy for the remainder of the year given that it was net of any one off effect which we saw in Q2.

William Kirby - Nevsky Capital

Okay. Thank you.

Operator

Our next question comes from Mr. Sergei Arsenyev. Please state your company name followed by your question.

Sergei Arsenyev - Goldman Sachs

Good evening, this is Sergei Arsenyev from Goldman Sachs. I just actually have just one question, given that inflation in Russia has been rising far higher than the expectations, especially if you compare it to the beginning of the year, I am just wondering what kind of impact you are seeing on your business both on revenues and on cost, and especially to your... to the budgeting exercise you were doing in the beginning of the year and what's the outlook for 2008 given this macro trend in the market?

Leonid Melamed - President and Chief Executive Officer

Thank you Sergei. The inflation in Russia, that is really a bit higher than expected, definitely arises pressure on our expenses side. So we have serious pressure coming from the media where the prices grew this year compared to the year 2006 more than 30%, and we anticipate for the next year the growth more than 20% for the media in Russia. We also have inflation that demands to increase the salaries and let's say some other kinds of expenses related to personnel. And so, that's actually kind of an impact we have on the expense side. On the revenue side, we have some benefits based on the appreciation of ruble of course and they are already... and you see them also as a part of our numbers that are presented today.

Sergei Arsenyev - Goldman Sachs

So, going forward, especially on the revenue side, do you think it will be possible for you to increase tax to reflect inflation, obviously not fully or maybe fully, but if your tax policy next year for you and for the market overall could follow the inflation trend?

Leonid Melamed - President and Chief Executive Officer

Sergei, I don't think that's going to be the marketing strategy of MTS for Russia and neither for the fourth quarter of this year, nor for the next year. We believe we will not be, due to the competition we have, in the position to increase our APPM almost in all of the segments of our operations. So we have to rely on the elasticity that is to slightly go ahead decreasing the APPM by stimulating the usage to end up with a growth of our ARPU. This is our target.

Sergei Arsenyev - Goldman Sachs

Great. Thank you very much.

Leonid Melamed - President and Chief Executive Officer

Thank you.

Operator

Our next question comes from Mr. Herve Drouet. Please state your company name followed by your question.

Herve Drouet - HSBC

Herve Drouet from HSBC. My first question is regarding Q4. Do you expect to put any special offer in Russian or in Ukraine for Q4 compared with what you have currently proposing? And my second question is regarding ARPU and specifically ARPU in 3G. Maybe you have done some analysis in the Russian market, I don't know if you can share with us any impact you may have in term of what you may expect to get in term of 3G ARPU when you will launch 3G strategies in Russia?

Leonid Melamed - President and Chief Executive Officer

Thank you Herve. So, Q4 promotions, yes, Q4 and especially December is the high season in our industry in all parts of the world. So, there will be, I believe, the set of promotions done by the competing companies and MTS would be of course in the position to operate adequately to this challenge. But once again, I don't believe we will somehow go for something that would change our well declared and announced marketing strategy and that would really hamper the markets where we operate.

Regarding ARPU in 3G, we've... on the presentation we made on the previous call, I believe, we've introduced a slide saying that we believe until the year 2011, our ARPU... incremental ARPU on 3G services will rise to the level of US$1.4 and that is our target and that's what has been reflected in the business case.

Herve Drouet - HSBC

And that's based on which assumptions in term of 3G consumer versus 2G consumer?

Leonid Melamed - President and Chief Executive Officer

This is the incremental ARPU that would, let's see --

Herve Drouet - HSBC

Just for the 3G users you are saying, so it's an incremental $1.4?

Leonid Melamed - President and Chief Executive Officer

No, I believe this number is the number that would like increase our all in all total ARPU we will face in like year 2011.

Herve Drouet - HSBC

Okay. And --

Leonid Melamed - President and Chief Executive Officer

For the blended ARPU.

Herve Drouet - HSBC

For the blended ARPU. And your assumptions by 2011 will be how much of 3G users you think you will have out of the total subscriber base?

Leonid Melamed - President and Chief Executive Officer

Up to 11 million 3G users until the year... in the year 2011.

Herve Drouet - HSBC

All right, thank you.

Leonid Melamed - President and Chief Executive Officer

Thank you.

Operator

Our next question comes from Ms. Nadejda Golubeva. Please go ahead with your question.

Nadejda Golubeva - Aton

Good afternoon. This is Nadejda Golubeva from Aton. My first question is about margins in Ukraine, could you please specify how much of the re-branding cost was incurred during third quarter and do I correctly understand that this expense won't be in fourth quarter? And could you also elaborate whether there will be some one off in fourth quarter in Ukraine, for example, connected with the CDMA launch, which could negatively affect margins? And possibly if you could give again some more color on the EBITDA margin in Ukraine, one off in third quarter and possible other kinds of one off in fourth quarter? And my second question was about bonuses. What is the normal practice for MTS? Do you really reflect bonuses for the year in fourth quarter or they would be like spread or they probably already will have partial operators [indiscernible]. So in other words, in which quarter bonuses will be reflected, in fourth quarter, in the first quarter... or in the first quarter 2008? And finally if possible could you please specify the interconnect revenue in Russia and if possible also break down the costs in Russia for sales and marketing, G&A and other expenses? Thank you.

Leonid Melamed - President and Chief Executive Officer

So let me answer the... Nadejda, hello, let me answer the first question. The margins in Ukraine, yes, they've been impacted a bit by the re-branding expenses to the level of, I would say, less than 1% on the margin in general for the Q3. Speaking about Q4, I would say and let's say the ongoing perspective, I wouldn't say that CDMA-450 has as a project a significant... will have a significant impact on the margin in Ukraine. What can make an impact is the competitive situation, when we meet with the quite serious competition with the... by the competitors who for the time being show very low margin. So this is a bigger challenge for us, either than the effect of CDMA-450 business plan. Regarding the bonuses, I'll ask Vsevolod to answer. Please.

Vsevolod Rozanov - Vice President and Chief Financial Officer

Thank you Leonid. Hello Nadejda, we account for bonuses on the accrual basis or basically they accrued quarterly and we do not expect any one offs related to the bonuses on the Q4. At this stage we do not expect any one offs as... getting back to your another question any... one offs are not expected for the Q4 anyway.

Nadejda Golubeva - Aton

Okay, thank you. And the last question --

Mikhail Shamolin - Vice President, Director of Business Unit MTS Russia

On the interconnect, this is Mikhail Shamolin speaking. We are not really breaking down the interconnect revenues. Of course, the only thing I can tell you is that the revenue of interconnect in the third quarter roughly equaled the cost and both were around $190 million.

Nadejda Golubeva - Aton

Okay, thank you very much.

Operator

Our next question comes from Ms. Olga Bystrova. Please state your company name followed by your question.

Olga Bystrova - CSFB

Good evening, Olga Bystrova from Credit Suisse. A few questions from me, first of all, on the cost side, the advertising expenses in Russia seem to be very benign, so to speak, in the third quarter, do you expect that to normalize in the fourth quarter? And also dealership costs in the Ukraine, is there anything that has been going on, particularly that you mentioned I think that some of the competition is happening not on prices, but on distribution and advertising, let's say. The second question is on data contribution to ARPU. In 3Q in Russia, this proportion of data ARPU or value added services ARPU has increased together with the growth in ARPU in general. What specifically... what services have been growing faster than the other, let's say, so what kind of... is that the GPRS or is that SMS etc.? And finally, CIS expansion, could you update maybe on the progress with Kazakhstan or/and Belarus and maybe some other markets that you're currently considering, how likely we could see some expansion in the short term? Thank you very much.

Mikhail Shamolin - Vice President, Director of Business Unit MTS Russia

Well, the first question is probably to myself. This is Mikhail Shamolin. We have seen some absolute increase in the advertising expenses in Q3. That was according with our marketing plan because we had more activities in Q3 than we had in Q4. But if you look at the subscriber acquisition costs within advertising and marketing, you would see that that actually went down as compared to Q2 because of the increased number of subscribers that we have picked up in this period. And in Q4, we are also planning to maintain pretty high advertising activity. So, we don't expect the advertising cost to go down in Q4 as compared to Q3, but we are also hoping to get a decent SAC number similar to Q3 because of also bigger number of growth in subscribers.

Pavel Pavlovsky - Vice President, Director of Business Unit MTS Ukraine

Okay, on the second question, this is Pavel Pavlovsky, MTS Ukraine. On the second question about the dealer commissions in Ukraine, I have to say that this is... the environment is highly dynamic. We have to remember that the pre-paid is sold without IG in Ukraine, and therefore basically the pre-paid is sold through up to 14,000 to 15,000 points of sale. Therefore this is pretty much the pool situation and the market is dominated by distributors rather than the specialized shop, and this determines the dynamics of the competition on the dealer commission side. So, basically in Q3, we have seen some improvements due to our efforts before the re-branding to reduce the dealer commissions a little bit, right, but of course for Q4 we planned some more aggressive activities, but you also have to remember these activities are of three levels. First of all, we stimulate the distributor itself, but we also have a special program, we used to be a pioneer of this program stimulating the actually part [ph] in the point-of-sales to sell our products and we have a quite innovative program stimulating the stuff in point-of-sales to sell our products. Thank you.

Olga Bystrova - CSFB

Okay. Thank you very much.

Mikhail Shamolin - Vice President, Director of Business Unit MTS Russia

And in terms of plus [ph], we had a pretty healthy value added services revenue growth in the third quarter as compared to second, in the pre-paid segment it has increased by 6% roughly, in the post-paid by 22%. In the post-paid it was mainly driven by vast consumption in roaming, because it is more than efficient from the revenue side and then in the mass or prepaid segment, it was driven mainly by increase in GPRS and SMS usage.

Olga Bystrova - CSFB

Okay. Look, maybe just a follow-up here on roaming, because I don't know if that's a mistake in the presentation, but I think your ARPU total and ex-roaming ARPU is the same in Russia. Is this a mistake or something that maybe you should explain what was happening with roaming revenues?

Mikhail Shamolin - Vice President, Director of Business Unit MTS Russia

I think this is just a mistake.

Olga Bystrova - CSFB

Just a mistake, okay, great.

Operator

Our next question comes from Ms. Nila [ph] Khan. Please state your company name followed by your question. Our next question comes from Ms. Nila [ph] Khan. Please state your company name followed by your question. Ms. Khan your line is now open.

Mikhail Shamolin - Vice President, Director of Business Unit MTS Russia

Operator, please move on to the next question.

Operator

Thank you. Our next question comes from Mr. Andrei Bogdanov. Please state your company name followed by your question.

Andrei Bogdanov - Troika Dialog

This is Andrei Bogdanov from Troika Dialog. Two questions if I may, one with regards to future performance of and your view on usage and ARPU. Am I right that it was hit, I think, the Bloomberg that you expect 400 minutes of usage by end of this '09? If that is right, given the current level of average price per minute, about 50 cents [ph] in Russia, that actually implies about $24 ARPU in two years time from now. So do you expect to see a substantial reduction on APPM in Russia because it seems like you are not really targeting $24 ARPU in such a short period of time or your usage guideline is probably too aggressive at this stage. Second question is with regard to your buyback program of your shares. If I understand correctly, you bought from the beginning of the program roughly 2% of outstanding ADR... GDRs; are you supposed to continue this program and if yes how much you would expect to buy from the market and at what period of time? Thank you.

Leonid Melamed - President and Chief Executive Officer

Thanks Andrei. Yes, it was stated today in the press conference that we anticipate the growth of usage in Russia to the level of 400 minutes in the periods of 2009 to the year 2011, and these forecasts are based on our understanding that currently our post-paid usage already at the level of 580 minutes and our corporate customers already have the usage over 400 minutes and... from one hand. From another hand, our experience we have in Uzbekistan where our customers already speak at the level of... use like 550 minutes a month. And in Belorussia where the usage is significantly higher than 400 minutes, we can anticipate that the blended ARPU in Russia would also... blended MOU in Russia would also grow to this levels and we really believe that it will happen next coming, let's say, 3 to 4 years.

I do anticipate that APPM will slowly grow down in Russia as well. I wouldn't say right now, I would say, to what exactly level because we are not in the position to give such a forecast. But last year we gave our forecast on ARPU in Russia to grow by the year 2012 to the level of $14 and it seems right now that it was, let's say, at minimum realistic forecast, I would say.

Regarding the buyback, we bought more than... we bought for the time being 2.6... 2.76% of our stock on the market from the beginning of the buyback program, say, from Q4, 2006 until now. Last quarter we bought 0.85% and in July the Board of Directors of MTS has approved to the prolongation of this program for additional 12 months. And we are in the position to, let's say, act in accordance with the decision of the Board of Directors. But of course I am not in the position to give you, let's say, complete guidance on the levels of purchase we now would be oriented... we will be oriented at. Thank you.

Andrei Bogdanov - Troika Dialog

Okay, thank you.

Operator

Our next question comes from Mr. Stephen Pettyfer. Please state your company name followed by your question.

Stephen Pettyfer - Merrill Lynch

Yes. Hi, Stephen Pettyfer from Merrill Lynch. Two questions please. Firstly considering just on the subject of usage and CapEx, given that your success in stimulating further usage growth and your recent comments about that 400 minutes, is it possible we could actually see CapEx in Russia increasing next year to support those supply revenue targets? And secondly on a related issue, I just see on Bloomberg you've made some comments concerning expansion outside CIS, specifically Africa and Asia. Could you give us some more color on your thoughts there please?

Leonid Melamed - President and Chief Executive Officer

Thank you. In terms of the first question, I would say that yes, based on the traffic increase trends that we see right now, we will have to ask the Board of Directors of the company to oversee some increase in the cap expenditures in 2G and 3G for the next coming year at least. And in total it corresponds with the 3+2 strategy of MTS where it's said that we have to offer the first class services to our customers quality-wise everywhere where we operate, but we don't anticipate significant changes in the CapEx on sales coefficient. We would... we've announced that we would like to follow the trend of a reduction in the CapEx on sales coefficient, and we look for keeping on this path actually.

Regarding the expansion outside CIS, as a part of our 3+2 strategy, it's said that we have to explore the opportunities outside our whole market; that is CIS. Once again on the top of our mind, this is our expansion inside CIS. So we try to look for all possible opportunities to answer the new market, same as to grow organically and in a non-organic way other markets where we are already present. Since we understand we have... we do have an understanding of those markets and we can in an excellent way use the synergies that are obvious on like the markets where we already operate and other CIS markets.

Different stories about the markets outside CIS. What we have to be concerned now is how keep on the path of offering our shareholders ROIC over 25% at the period after 2012 because last year's strategy 3+1 stated that we have to... we are oriented to provide 25% ROIC in the next coming five years. And we also were oriented on double-digit revenue growth for the same period. So the challenge for the management for the time being is to manage to expand the period of double-digit top line growth accompanied with a serious, let's say, bottom line results for the period over 2012.

And that's what we understand can be achieved, mostly once we can, let's say, develop our operations to the new markets. Go to the new markets means to having to understand exactly how you can make value out of that. So... and that's why in MTS we are right now in the kind of assessment process to understand better whether we have the value that we can bring to those markets, whether the entrance to those wouldn't be too expensive for us at the time being. And as we promised before, we will somehow announce our view on that in a more concrete way on the disclosure of Q1 results of the year 2008. For the time being we are in assessment phase.

Stephen Pettyfer - Merrill Lynch

Okay, thank you.

Operator

Our next question comes from Mr. Alexander Vislykh. Please state your company name followed by your question.

Alexander Vislykh - Morgan Stanley

Yes, Alexander Vislykh from Morgan Stanley. Just wanted to follow-up on your answers to the previous questions regarding usage in Russia and are you taking any active steps to introduce the post-paid credit based tariffs in the mass market and if so, what's the progress on that and what pickup rates are you seeing from your subscribers for these tariffs?

Mikhail Shamolin - Vice President, Director of Business Unit MTS Russia

Yes, this is Mikhail Shamolin once again. Yes, of course we do. I mean, one note that should be made is that the classical definition of post-paid and pre-paid in Russia is slightly different from what you typically see in the West because we don't have heavy phone subsidies in the market. Our so called post-paid customers are also in most cases pre-paid, therefore they keep the balance in their account and at the same token, our pre-paid customers do have access to credits. We have launched mass credit offers in May this year and we heavily promoted them during May-June. Essentially all of our pre-paid subscribers now have access to credit depending on their usage numbers, their loyalty to the company, and their credit history. But essentially credit is available to everybody and we are actively promoting it, especially in our heavy customer segment where we actively offer to customers to minimize revenue loss when customers are in roaming, for instance, and having difficulties in filling their accounts. So the credit side is actively pursued by us and we see it as another potential to further increase usage and ARPU.

Alexander Vislykh - Morgan Stanley

Sorry, just... can you just specify how many subscribers have you signed up for these tariffs over... in percentage terms or in numeric terms?

Mikhail Shamolin - Vice President, Director of Business Unit MTS Russia

I wouldn't be able to give you an exact number, but I would tell you that approximately 70% of our post-paid subscribers have credits as a standard feature in their account and with the pre-paid segment this number is around 15% to 20%.

Alexander Vislykh - Morgan Stanley

So, they have access to those tariffs, but they not necessarily have taken them up, is that correct?

Mikhail Shamolin - Vice President, Director of Business Unit MTS Russia

In the post-paid... out of the 70%, I would say almost all of them actually do use credit. In the post-paid, it is less, approximately half, but the trend is increasing in terms of credit attractiveness. So we see the positive dynamic in them expanding the credit usage.

Alexander Vislykh - Morgan Stanley

Okay, thank you very much.

Operator

Our next question comes from Mr. Alex Kuznetsov. Please state your company name followed by your question.

Alex Kuznetsov - Bear Stearns

Good evening. It's Alex Kuznetsov from Bear Stearns. First of all, let me greet you on delivering another quarter of strong results. I would like to ask a couple of questions. First of all, I noticed a 7% increase in effective tariff in Ukraine. Is it primarily due to strong roaming revenue or cancellation of some discounts? Secondly, I would like to ask for the reason for such a strong increase in Russian churn. And finally, you touched upon this question, but I feel it's quite interesting to elaborate it further. I noticed that your subscriber acquisition costs in Ukraine significantly declined by about 20% quarter-over-quarter. What are the reasons for this trend? Thank you.

Pavel Pavlovsky - Vice President, Director of Business Unit MTS Ukraine

Okay. This is Pavlovsky MTS Ukraine answering the first question. Yes, you are absolutely right. The increase is to some extent due to roaming, to a difference for the roaming because it's a high season in Ukraine. And yes, we did some adjustments in the tariffs with minor catching of some free time for friends and family and so on, which had a positive impact on our APPM. Thanks.

Leonid Melamed - President and Chief Executive Officer

Yes. With regard to churn, it's actually quite seasonal. We had a seasonal increase in churn in Q3. We also had it in 2006 and this is mainly due to the fact that the New Year promotions and the heavy season is typically churned six months later, which is Q3.

Alex Kuznetsov - Bear Stearns

Thank you.

Pavel Pavlovsky - Vice President, Director of Business Unit MTS Ukraine

Yes, the reduction in SAC is mostly... I already touched upon it before, is due mostly to our work with distributors and dealers before the re-branding because the re-branding created enough of pool effect, right? So we had the luxury to reduce the dealers' commissions, especially in post-paid where we used to pay more for the heavy post-paid, but the light post-paid was introduced despite a different compensation scheme, right, and some other cost optimizing measures resulted in the lower SAC. Thank you.

Alex Kuznetsov - Bear Stearns

Thank you very much. Just one follow-up question, if I may. When you reduced promotions in Ukraine, have you noticed change in MOU or people continued using about the same... continued generating about the same traffic in spite of reductions in promotions?

Pavel Pavlovsky - Vice President, Director of Business Unit MTS Ukraine

Well, I mean, doing re-branding we never reduced the promotions in Ukraine if I understand you correctly, right? But see a positive trend in MOU, which is resulting, I guess, first of all from our new tariff scheme where, as I said, we use a regressive scheme offering the lower cost for the longer calls. That's... I mean, that's been effective for service [ph] in September-October, that's a bit slow, but yet we see a positive trend.

Alex Kuznetsov - Bear Stearns

Thank you very much.

Operator

Our next question comes from Mr. Taras Shumelda. Please state your company name followed by your question

Taras Shumelda - American Century Investment Management

Hi, this is Taras Shumelda, American Century. My question is on BlackBerry in Ukraine and I am switching between two conference calls. So I apologize if I am asking something that's been asked. My current understanding is that it is illegal to offer BlackBerry service in Russia and a lot of Russian businessmen get their BlackBerries in UK or in other countries. So obviously my question is, one, is it indeed so? In other words, this service cannot be offered in Russia? And second, what is the price differential between the service that you plan to offer in Ukraine and what Russians can get outside of Ukraine and what are your expectations in terms of... maybe you could provide either in customer growth or margin under product or basically any guidance which you can offer in this respect. Thank you.

Leonid Melamed - President and Chief Executive Officer

Let me comment on this situation in Russia and just want certify that yes, it's illegal for the time being to sell and use BlackBerry in Russian Federation. The... we are looking for some changes, but for the time being it is forbidden. And in Ukraine, we mostly oriented with operations on the local market. And we don't see business case based on the, let's say, switchers from the international networks to our Ukrainian BlackBerry solution, although our prices in Ukraine are relatively cheaper than one can get in the Western Europe for the same services. I would indicate like by 15% cheaper.

Taras Shumelda - American Century Investment Management

Can I ask a follow-up question here?

Leonid Melamed - President and Chief Executive Officer

Please.

Taras Shumelda - American Century Investment Management

Where have you launched the services and can you... I realize it may be way too early to ask this, but I am trying to get some sort of a feeling for one, whether Ukrainian customers are responding positively to this, and if so, to what extent? And two, are you seeing increase from your Russian customers and is this service going to be advertised in Russia in anyway at all, whether in a big way or may be just some sort of a small line on the bell the next time your customers get their statements? Thank you.

Leonid Melamed - President and Chief Executive Officer

Pavel please.

Pavel Pavlovsky - Vice President, Director of Business Unit MTS Ukraine

Yes, I mean, the response was overwhelming and as we know, re-introduction capacity is limited. So the terminals, which have been Russified, they decided it's been already sold out and customers signing up for BlackBerry terminals in Ukraine.

Taras Shumelda - American Century Investment Management

How about the advertising?

Pavel Pavlovsky - Vice President, Director of Business Unit MTS Ukraine

Yes, sorry. We introduced the service, [indiscernible] complaint, but we do not advertise the BlackBerry in Russia.

Taras Shumelda - American Century Investment Management

Okay. So is it safe to assume that you do not subsidize BlackBerries in Russia at all... in Ukraine at all?

Pavel Pavlovsky - Vice President, Director of Business Unit MTS Ukraine

Not for the time being.

Taras Shumelda - American Century Investment Management

Thank you.

Operator

Our next question comes from Sam Velocin [in]. Please state your company name followed by your question.

Unidentified Analyst

Yes, hi, this is Sam Velocin from Velocin [ph] Capital. I have two questions concerning local MTS service, and please forgive me if I am repeating somebody else's question because I signed in a little late. Question number one, you have paid the dividends for the past year and I think you declared them in May or June on both MTS local shares and ADRs. ADR dividend has been received, but for some reason local shares have not been received. So I am trying to understand whether the problem is at your level or at the agent level?

Vsevolod Rozanov - Vice President and Chief Financial Officer

This is Vsevolod. As I mentioned in my speech, the dividends were almost paid, almost all amount has been paid already. And true, they were paid to ADR holders. Speaking about the local shareholders, I believe that there shouldn't be an issue on our front because what is remaining is a few payments to local individuals, but as the payment was done a few days ago only, the last payments to the Russian shareholders, it might be under way. We will follow up anyway on your particular issue.

Unidentified Analyst

Okay, please. And on the second question relating to the local shares again, they continue to trade at 26% discount as of right now, let's say. And there is really no fundamental reason for that discount to exist. On your last call you were talking about trying to sort of speak to Russian investors and to other people trying to narrow the gap that way. But apparently it's not working. So I wanted to come back and ask you the question about the buyback again. Does it makes sense to be buying shares for your program when there is really no difference for your needs whether it's local shares or ADRs and paying 26% more for them?

Leonid Melamed - President and Chief Executive Officer

In accordance with what we have promised, we have undertaken certain activities to introduce ourselves in a better way to the local investors for local shares. Though it was... we realized that actually the level of information those investors have is quite significant already and the... that's why... I mean, hardly can be very effective for the time being to rely on some specific increase of interest to the investors in the local shares different to ADRs, for example. But as we promised, we have undertaken these activities and we will proceed with them in the future. We once already commented, the Board of Directors of MTS have revised the issue of buyback in the local market and as long as the analysis told us that the main problem for the... or the main reason for this gap in prices for local shares different to the ADRs is the liquidity issue by buying, let's say, out the stocks from local market we would only worsen the liquidity issue and by that would even probably increase the gap instead of closing the one. That's why it's been decided for... at least for the next coming 12 months for MTS not to undertake activities on buyback on the local market. Thank you.

Unidentified Analyst

Okay. Let me just follow-up on this a little bit, again the gap still remains and it's a really sort of a gap in your capital structure because it effectively undervalues your company due to this discount. Is the other option... by the way, I really think that actually the gap will narrow if you were to have a buyback rather than widen, but it's a matter of obtaining [ph], but as another option, is increasing of ADR capacity facility something that you have considered or is that completely out of the question because of the Russian law limitation?

Leonid Melamed - President and Chief Executive Officer

We've already reached a level of maximum possible free float on the international market in accordance to the Russian law where 40% is the maximum level; that's why unfortunately we cannot undertake any new, let's say, free float with our ADRs.

Unidentified Analyst

Okay, thank you.

Leonid Melamed - President and Chief Executive Officer

That's why we cannot convert by that the local shares to those ADRs, if that's what you mean.

Unidentified Analyst

There is no exception that you can apply for?

Leonid Melamed - President and Chief Executive Officer

Unfortunately not, unfortunately.

Unidentified Analyst

Okay. Thank you.

Operator

Our next question comes from Mr. Will Milna [ph]. Please state your company name followed by your question.

Unidentified Analyst

Thanks. It's Will Milna [ph] from RSI Research. Couple of probably related questions. Firstly, there appears to be significant disconnect between the recent sort of comments around 400 minutes of usage by 2009 to 2011, a slight decline in APPM at $14 ARPUs by 2012. I guess either pricing is going to decline far faster than people expect or ARPUs are going to be as many have speculated quite a lot higher. When do you expect you might be able to address that sort of disconnect in the long-term guidance?

Secondly, obviously you've had a lot of success in Russia growing the usage levels. So, if I could just focus on pricing. If I very simply divide ARPU by usage, I would come to the conclusion that prices have fallen sort of 6% year-over-year. Yet on slide 16, you seem to be saying prices have risen. So, I guess the question really is what am I missing? Because it does seem average prices have fallen around 6% time when you have inflation and consumer prices increasing nearly 10%. So, I guess the question is going forward what is the expectation for APPM?

Leonid Melamed - President and Chief Executive Officer

Well, I have to... can add [ph] something to the previous statement regarding the ARPU trends based on the usage. So, I really would like to avoid any, let's say, more dynamic forecasts, either the ones that we gave last year, but we are optimistic, I would say, with the trends on usage and we have all of the reasons, ones that I already mentioned to forecast that the usage will grow quite aggressively. And we also understand that it would be accompanied with some decrease in APPM, but I don't believe it's really in the interest of the company to undertake some specific actions to significantly and in a cheap way to reduce the prices to... now, let's say, to effect significant and the quick reduction of APPM to be compensated by MOU growth. It would be step-by-step case, but I would like to avoid any future guidance on the real size of ARPU and I would say that there are already more optimistic forecasts done by analyses on the market and actually we are very attentively reading and taking into consideration this kind of statements.

Unidentified Analyst

Okay. And then maybe if I can just quickly phrase it a different way, to get to the 400 minutes of usage in that timeframe, you seem to be implying an acceleration in the rate of usage growth from the current level, which I think is around 24%, is not something you expect to happen?

Leonid Melamed - President and Chief Executive Officer

We anticipate, yes, the trend of growth in MOU will be in the future years higher than we have anticipated, let's say, in the year 2007 compared to the year 2006. It was quite high actually, 24% is quite an achievement, but we can think... we do think there is a potential to grow this number in the future. For example, because there are a lot of new customers who joined the company in pre-paid segment last year with significantly lower MOUs, but the time they stay in the networks, the usage grow and we really anticipate that this customer base would have growth of usage, with growth of its ARPU we will generate the main reason for the growth of revenue for the company in the future.

Mikhail Shamolin - Vice President, Director of Business Unit MTS Russia

I can just add one thing... this is Mikhail Shamolin speaking... to your question. I mean, basically we are quite confident that the MOU is going to grow and is going to grow pretty quickly. I think the key question that you are trying to get to is what will be the pricing dynamics.

Unidentified Analyst

Yes.

Mikhail Shamolin - Vice President, Director of Business Unit MTS Russia

And the answer to that, I mean, very honestly we don't know and it would be sort of not appropriate to us to be giving those kinds of estimates, because it really depends on the competitive behavior on the market. If the competitive behavior continues to be rational, then we would see MOU growth with the APPM being stable or slightly decreasing given the regional competition that we have got. If the competition really intensifies between the major players, then we may see APPM going down. Of course we are interested in the first scenario rather than the second, but with the income growth that we see in Russia and with the sort of habit of using mobile phone increasing among the mass segment, we don't really see the current level of APPM being a strong limitation to the usage growth.

Unidentified Analyst

Okay, that's pretty helpful. Could I just ask one follow-up... just a sort of technical question on the definition of a subscriber in Russia; I mean, obviously adding 1.7 million customers, a sign of penetration well in excess of 110%. I mean, that kind of implies a lot of multiples in ownership or high level of inactivity. Can you just confirm what is your disconnection policy, what do you consider to be a customer? And if you moved, I guess, to a more standard definition of a customer having made or received a call at least once in the last three months, how many of the 54 million customers in Russia would no longer be I guess a registered customer?

Mikhail Shamolin - Vice President, Director of Business Unit MTS Russia

Yes, I mean, our churn policy has not changed since, I think, it was published really. And it is that we clean out subscribers from our customer base after six months of inactivity if their balance is zero or negative. And if the customer's balance is positive, I think we clean them out within sort of one year. That's pretty much what we do.

Unidentified Analyst

Okay. And you obviously don't track the number of customers and I guess in the way that Vimpelcom might do, that have made or received a call or text in the last three months?

Mikhail Shamolin - Vice President, Director of Business Unit MTS Russia

We track customers in all kinds of possible ways, but it's a question of what we disclose and what we don't disclose.

Unidentified Analyst

Fair enough. Thanks.

Operator

Our next question comes from Mr. Alexei Yakovitsky. Please go ahead with your question.

Alexei Yakovitsky - Deutsche Bank/UFG

Yes, good evening gentlemen. It's Alexei Yakovitsky from Deutsche Bank. Congratulations on the strong numbers first of all. I'd like to go back to the Ukrainian market, if I could. You obviously posted very strong performance in the quarter in Ukraine and I think I appreciate that. The things are probably going to be a little bit more intense in the fourth quarter, we see no reasons, but still would you say that the competitive environment has stabilized a bit as I think you hoped it would or things improving, should we expect a little bit more stable fourth quarter, or a bit more stable first quarter of '07 compared with previous fourth and first quarters, which I think were a little bit disastrous? And if the answer is yes, what are you driving at from the competitive landscape point of view, is that you, Vimpelcom, Astaliv [ph] have things that you can become a little more stable? Thank you.

Leonid Melamed - President and Chief Executive Officer

Thank you Alexei. We would like to state that we see the positive trends in the Ukrainian competitive situation. Definitely it's much different from was anticipated by a lot of people around when we disclosed our Q4 and Q1 results of this year. We do a lot ourselves as MTS to somehow stabilize the situation and we don't undertake, let's say, extremely aggressive steps in order to, let's say, help the market to grow since there were significant reasons the market will just move to the negative development numbers. And this is the path we want keep in the future, but the situation is very much dependent on the behavior of our competitors. Since the 2-3 of them have once again a very, let's say, limited I would say margins for the time being and still perceive the investments. That's why we will have to anticipate the kind of activity from their side and we believe we'll be able to somehow maintain the situation. But I would really proceed watching very precisely on the development since the situation is different, I would say, from what we see in the other markets of our operations. It we say that we anticipate until the year 2012 the overall revenue growth on the CIS market by 137%, and in Russia as a part of this market by 130% with accumulated aggregated growth rate for Russia at the level of 15%, and as the other markets including Russia where we operate almost 17%. So in Ukraine we really forecast in this period of time the accumulated growth rate in one digit area. And this forecast is, let's say, kind of a reflection of this special competitive environment we have over there.

Alexei Yakovitsky - Deutsche Bank/UFG

Okay, thank you.

Operator

Our next question comes from Ms. Nila [ph] Khan. Please state your company name followed by your question.

Unidentified Analyst

Hi, hello, hello?

Leonid Melamed - President and Chief Executive Officer

Yes, hello.

Unidentified Analyst

Hi, can you hear me? Hi, sorry, I did try to ask question before, but I couldn't be heard. I wonder if you can please outline your debt repayments in the next 12 months please. Thank you.

Vsevolod Rozanov - Vice President and Chief Financial Officer

Thank you. Nila, we will be repaying our bonds and euro bonds, which are due at the end of January next year. And until the end of the next year there won't be any other large debt repayment... debt repayments --

Unidentified Analyst

So, no other big loans syndicated or bilateral?

Vsevolod Rozanov - Vice President and Chief Financial Officer

No.

Unidentified Analyst

Okay. And do you have any plans to continue to shift into ruble bonds, ruble... generally ruble debt financing away from dollar?

Vsevolod Rozanov - Vice President and Chief Financial Officer

Yes, we do have plans and we announced these plans two months ago. And at this stage we are proceeding according to the schedule. We provided... submitted the documents to Federal Service on the Financial Markets. We expect to receive approval and answer from the Federal Service beginning of December and as you are probably aware, the documents... the prospectus registration will be valid for one year. And according to the corporate news, according to the timing of the appearance of the corporate news we will be raising the financing if needed.

Unidentified Analyst

And how bigger this shelf registration is going to be?

Vsevolod Rozanov - Vice President and Chief Financial Officer

The registration is for 30 billion rubles, which is approximately $1.2 billion.

Unidentified Analyst

Okay. And would that mean that you might be replacing some of the euro bonds with ruble financing?

Vsevolod Rozanov - Vice President and Chief Financial Officer

At this stage we are not aiming at that section exercise.

Unidentified Analyst

Okay. All right, thank you.

Vsevolod Rozanov - Vice President and Chief Financial Officer

Thank you.

Operator

We have a follow-up question from Ms. Olga Bystrova. Please go ahead with your question.

Olga Bystrova - CSFB

Good evening. Again, I think my question on the shares expansion was unanswered, if you... if possible of course you can update us on how likely we could see some expansion in the short-term given potential talks about interest in Kazakhstan and consolidation in Belorussia. And also another question is you are talking about, let's see, longer term ARPU and usage potential in Russia, have you really thought how it could look in the Ukraine, for example, longer term or medium term even if it is hypothetical at this stage sort of preliminary analysis that will be great. Thanks.

Leonid Melamed - President and Chief Executive Officer

Well, I am sorry that we have not answered your question regarding shares expansion, but I think I have touched it actually when I have been answering the other questions. We... actually there is no new information I can give to you. We are... we tried to develop ourselves, but in the shares market and as I said, it is at the top of our mind, but really for the sake of a lot of reasons we withdraw any forecast on the timings and let's say the deals in countries et cetera. That's actually it.

For the development of the usage in Ukraine, we really believe the usage in Ukraine would be also in the high, let's say, numbers, over... much higher than 200 minutes because I don't see any reason why Ukrainians would... Ukrainian consumption behavior would be different from the Belorussian behavior, for example the Russian behavior. But we don't give... we are not prepared for the time being to give a more concrete, let's say, public forecast. And that of course in our business plan that is three-year-old and that is oriented to the year 2010, we have some forecast and use them as assumptions to create our business cases.

Olga Bystrova - CSFB

Okay, great. And if you don't mind I will ask another question on the seasonality in Russia. Obviously given that you expect usage and ARPU to grow quite well going forward, do you think that will be accompanied by increased seasonality or smoother seasonality going forward? And I am particularly interested, let's say, in the fourth quarter, do you think we could see something we saw last year or we could see, let's say, stronger ongoing usage and ARPU growth in the fourth quarter? And, for the next year, what you feel the market could look like in that respect?

Mikhail Shamolin - Vice President, Director of Business Unit MTS Russia

Yes, this is Mikhail Shamolin. With regards to seasonality, with usage growth in the mass segment, we expect seasonality to be smoothening out because in the past few years our seasonality was mainly explained by high growth in roaming revenues in the heavy customer segment, and because historically MTS has been a leader in customer segment and corporate segment that of course affected the seasonality quite a lot. As we pick up more customers in the mass segment and as the usage grows in the mass segment, of course we would see less of an impact happening. I wouldn't give you an exact guidance of how it'd look like, but overall we expect it to smoothen out.

Olga Bystrova - CSFB

Even in the fourth quarter this year?

Mikhail Shamolin - Vice President, Director of Business Unit MTS Russia

To some extent.

Olga Bystrova - CSFB

To some extent. Okay, great. Thank you so much.

Operator

Our next question comes from Mr. Alex Kuznetsov. Please go ahead with your question.

Alex Kuznetsov - Bear Stearns

Good evening. I have one more follow-up question. I noticed explosive growth in your Armenian subscriber base last month. Could you comment on the reasons for such a strong subscriber acquisition in October please?

Leonid Melamed - President and Chief Executive Officer

Well, we... in October, for obvious reasons, not the months when the effect of synergies with MTS Group can become evident. So, we are just right now in the process of the adoption of the corporate strategy for our Armenian daughter company and adopting the business plan for them and with them. So, there is a normal... I mean, the trend we see now in Armenia is just the continuation of the developments that took place in this country, let's say, from the beginning of this year. And we... they are actually developing in accordance with our forecast. We have a special option program with the minority partner, with the current minority partner. So they can even out as we announced before based on... and get additional payments from us for the shares they've sold to us based on the performance parameters of the company. And I would say that yes, the company operates right now in the way that these earn-outs that is divided into two parts, one to happen at the beginning of the next year based on the results of the year 2007, and the second one based on the results of the year 2008. So for the time being, the company results are driving as to the situation and this is now going to happen. That means it drives us to the forecasted numbers and the anticipated numbers.

Alex Kuznetsov - Bear Stearns

Does it mean that you anticipated such a big 27% jump in one month because --

Leonid Melamed - President and Chief Executive Officer

I have to look more thoroughly maybe in the number; I have not seen the 27% jump ourselves. So we can comment on that later.

Alex Kuznetsov - Bear Stearns

Thank you very much.

Operator

[Operator Instructions].

Andrei Terebenin - Vice President of Corporate Communication

Okay. Seems like there is no more questions left. Thank you very much ladies and gentlemen for your participation. We welcome you at any time to contact our Investor Relations Department if you have any further questions. A webcast of this discussion will be available on our website if you wish to replay the call. In the meantime, we appreciate your interest and wish you a very pleasant day. Thank you again.

Operator

This concludes the third quarter 2007 financial and operating results conference call. Thank you for your participation and have a great day.

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