12. Major risk factors

12. Major risk factors


are an operator, which provides chargeable telecom services to subscribers. Our financial position and operating indicators depend among other things on the paying capacity of the population, competitive environment in the countries of presence, demand for our services and operations effectiveness. Our activities are regulated by the state, in particular, through licensing and the laws effective in the countries of our presence. We use radio frequencies, which are allocated by the states of these countries. We are planning to develop the infrastructure of our network through the expansion of the coverage and the increase of capacity of the existing network in the licensed territories, further expansion of our operations in the countries of our presence and other countries through new acquisitions or new licenses, which is taken into account in our program of capital investments.

Macroeconomic instability and slowdown in the economic growth in the countries, where the company operates, may result in the decrease of demand for the services provided, decrease of revenues and indicators of effectiveness of the Company. The financial market crisis may restrict the Company's ability to raise debt financing, limit the Company growth rates, affect the financial position of the Company.

Our business activities, operating indicators and financial position may depend on the relations between Russia and other countries of our presence, effectiveness of local and regional authorities, economic situation in these countries and in Russia, social situation. The economies of the countries of our presence are subject to the influence of the world economic slump and economic slowdown and also depend on the dynamics of the prices for raw materials in the world market.

The telecommunications market is subject to rapid and significant changes in technology and features continuously appearing new products and services, which require constant alignment with them. Consequently the technologies that we currently use may become less profitable and even obsolete. The competition is growing including the competition from potential new mobile and fixed lines operators in the markets, where our Company already operates. To manage this risk the Company invests in the increase of the portfolio of value added services as well in the roll-out of 3G network and development of other wireless and fixed line services. Among other things our competitive position, financial and operating indicators depend on the implementation of these initiatives.

We believe that the rapid growth of the Internet use in our market will continue, that MTS OJSC mobile and fixed assets will supplement each other after COMSTAR-UTS OJSC's merger and that the combination of communication assets will allow us to develop and provide complex telecommunications services and to benefit from the possibility of cross-sales. If any of these assumptions are not correct, and if were are not able to effectively implement our strategy, our major investments in the former COMSTAR-UTS OJSC may not pay back, which may have a significant negative impact of the results of our activities.

The state bodies of the countries of our presence have a high degree of freedom with respect to granting, extension, suspension and withdrawal of licenses, definition of criteria for classifying companies in certain territories as monopolists, companies having a dominant position and/or a significant position by issuing corresponding decrees and laws. E.g., on December 21st, 2010 the BCTI license for provision of telecom services was suspended based on the letter of the Ministry of Posts and Telecommunications of Turkmenistan. At present there is a risk of complete termination of MTS's activities in Turkmenistan without possibility of selling BCTI's assets to any third party and withdrawal of accumulated dividends from the country.

If we or any of our subsidiaries are classified as having a dominant position in the country of our presence, the government of this country will be able to apply certain restrictions to our activities, tariffs for telecom services and traffic transmission, which may affect our business, financial position and operating results. The capacity of our network and the feasibility of its expansion, which among other factors are important for maintaining the market share as for subscribers and revenues, will depend on the ability to timely extend the right to use the allocated frequencies and get new frequencies. E.g. MTS UKRAINE PrJSC among 8 other operators was classified as an operator having a monopoly (dominant) position in mobile call termination market, and now has to apply in its networks the call termination rates that are set by the National Commission for Communications Regulation (NCCR).

We keep the main portion of our ruble and hard currency reserves in Russian banks, including the subsidiaries of foreign banks. A notable portion of our expenses, costs and liabilities, including capital expenses and loans are nominated in USD and/or EURO, while the main portion of our revenues is nominated in local currencies of the counties of out presence. The situation in the markets of our presence, including the stability of the banking system, inflation, fluctuation of exchange rate of local currencies to USD and/or EURO, influences our operating indicators and operating results.

Agreements on our active bonds and bonds of our controlling shareholder AFK Sistema as well as some loan agreement contain liabilities, which among other things restrict our capability as well as the capability of AFK Sistema OJSC and its subsidiaries (including our company) to raise borrowed funds, create security interests, dispose of assets, carry out merger and consolidation with other parties, sell or transfer our GSM licenses or GSM licenses of our subsidiaries, including those of our foreign subsidiaries. Non-performance of these obligations as well as the change of the majority shareholder may result in the early redemption of Eurobonds.

For more information on the risks please see section "Item 3ጠKey InformationጠD. Risk Factors" in the annual MTS OJSC 20-F Report and the quarterly MTS OJSC Reports for 2010.