Russia

SEK million	2010	2009	Change
Number of customers (in thousands)	18,438	14,451	28%
Net sales, external	10,142	7,540	35%
EBITDA	3,573	2,473	44%
EBIT	2,770	1,822	52%

Key priorities in 2010

The Russian operation is Tele2’s most important growth engine. Tele2 has GSM licenses in 37 regions in Russia covering 61 million inhabitants. The Russian operations consist of 17 old regions and 20 new regions, the main differentiator being the maturity level of each operation. The licenses for the 20 new regions were received in 2007 and all regions have been launched commercially.

Tele2 Russia can be split into three categories, during a transitional period, depending on maturity level: Newcomers, Challengers and Defenders.

In 20 out of 37 regions, Tele2 acts as a Newcomer. In these regions, the main goal is to acquire customers and expand market share. Through clear price leadership, wide distribution and innovative marketing, Tele2 can quickly expand its market position.

In 6 out of 37 regions, Tele2 acts as a Challenger. When moving from a Newcomer to a Challenger position, Tele2 Russia will increase its focus on ARPU development and retention activities beyond the strong focus on subscriber acquisition.

Tele2 Russia is market leader/Defender in 11 out of 37 regions. As a market leader, Tele2 focuses on retaining its existing customer base and maximizing its contribution. Through simple and easy-to-understand pricing plans, combined with attractive add-on services such as data access, the company is able to improve average revenue per user in mature regions.

Tele2 Russia’s total customer base amounted to 18,438,000 (14,451,000) on December 31, 2010. The competitive environment in Russia is, and will be, very tough. Tele2’s main differentiator, as in all countries, is a clear price leadership position. However, as the market evolves it will become increasingly important to find other means of differentiation against competition, be it marketing concepts, distribution channels or customer care. Customer perception is even more critical when the total customer base uses prepaid services.

In 2010, Tele2 Russia successfully pursued its strategy of improving the operational contribution of its more mature regions to support the roll-out of commercial networks in new regions. Tele2 gained totally 3,987,000 (2,947,000) new customers during the year. The turnover of the total customer base was improved during 2010, despite increased competition. Tele2 Russia maintained its effort to stay best in class when it comes to customer retention and continued to work with commission structure to the retail channels in order to further enhance the quality of the customer intake. During the year, Tele2 Russia expanded the geographic scope with several preferred distribution partners to include numerous new cities.

Despite an impact from customer base growth in new regions, MoU for the total operations increased by 7 percent compared to 2009, amounting to 231 (215). ARPU amounted to SEK 51 (50) or RUB 216 (207). The general pricing environment remained highly competitive throughout the Tele2 Russia footprint.

Tele2 Russia continued to deliver solid financial performance throughout the year. Net sales grew by 35 percent in 2010, compared to last year. The EBITDA margin development was driven by strong operational performance in the more mature regions, focusing on customer retention measures and stimulating usage. EBITDA in the 17 mature regions amounted to SEK 3,892 (2,950) million, equivalent to a margin of 46 (41) percent. EBITDA in the new regions amounted to SEK -319 (-477) million.

Challenges to address in 2011

Tele2 Russia will keep looking for possibilities to carefully expand its operations through new licenses as well as by complementary acqusitions. Tele2 Russia will continue to look for the possibility to receive 2G licenses in regions where it does not yet operate, and secure next generation mobile licenses in its existing footprint.

Distribution will remain an important differentiator in the Russian mobile market. Tele2 Russia will continue to pursue its multi-pronged approach with local distributors, together with federal dealers and mono brand stores. In 2011, it will be important to develop long term relationships with all parties and secure a well performing distribution network.

In 2011, it will still be a major focus point to balance improved profitability in Tele2 Russia’s more mature regions, while gaining scale in the new regions - and by doing so, reaching EBITDA break-even.

Tele2 Russia will continue to look for possibilities to carefully expand its operations in Russia through new licenses, as well as by complementary acquisitions that fit with its corporate culture.