AFK Sistema : Statement regarding JSOC Bashneft and related proceedings

Statement regarding JSOC Bashneft and related proceedings

Moscow,Russia - October 23, 2014 - JSFC Sistema ("Sistema") (LSE: SSA), the largest publicly-traded diversified holding company in Russia and the CIS, announces that following today's hearing by the Arbitrazh (Commercial) Court of the City of Moscow of the civil claim of the First Deputy General Prosecutor of Russia against Sistema and Sistema-Invest, the Court has set the next hearing for October 30, 2014. 

Background to the legal case

A summary of key information currently known by Sistema regarding the Company's acquisition of shares in JSOC Bashneft ("Bashneft") and the status of all proceedings is provided below.

The acquisition of the BashTEK companies by Sistema

In 2005, Sistema, through its subsidiary CJSC Sistema-Invest ("Sistema-Invest"), purchased blocks of shares in Bashneft and five other Bashkir oil and energy companies (together, the "BashTEK companies") from third party private Russian companies at a price of US$ 0.6 billion (the "First Acquisition"). The shares acquired under the First Acquisition constituted between 21% to 25% of the various BashTEK companies. 

In 2009, Sistema increased its stake in the BashTEK companies to more than 75% by entering into agreements for the purchase of controlling stakes in the BashTEK companies (the "BashTEK Shares") from third party private Russian companies (the "SPAs" and the "Second Acquisition"). 

Under the terms of SPAs, the price to be paid for the BashTEK Shares was US$ 2 billion plus an additional payment of US$ 0.5 billion which, under the terms of the SPAs, was conditional on the fulfilment of a number of conditions.  These conditions were not met and, as a result and in accordance with the terms of the SPAs, the additional payment of US$ 0.5 billion was not payable. 

Prior to completing the Second Acquisition, Sistema obtained the approval of the Russian Antimonopoly Service for the acquisition of the BashTEK Shares. 

The consideration paid for the BashTEK Shares was consistent with the price determined by an independent appraisal that was obtained for the purposes of attracting financing for the Second Acquisition. This financing was obtained from one of the largest Russian state-controlled banks, and the financing was to be secured by the BashTEK Shares and other Sistema group assets. The price per share paid for each of the BashTEK Shares under the Second Acquisition was at a significant premium to the then market trading price for BashTEK Shares. 

At the time the BashTEK Shares were acquired, there were no prohibitions or restrictions on transactions with the shares in these companies.

The civil proceedings brought against Sistema and Sistema-Invest

According to the documents currently in the possession of Sistema, on September 24, 2014, a civil claim (the "Civil Claim") was filed with the Arbitrazh (Commercial) Court of the City of Moscow (the "Arbitrazh Court") by the First Deputy General Prosecutor ("Prosecutor") seeking the return to federal ownership of all shares in Bashneft (into which four of the other BashTEK companies were merged in 2012) held by Sistema and Sistema-Invest (the "Bashneft Shares"). 

The Civil Claim asserts that the privatization of Bashneft was unlawful as Bashneft was originally the property of the Russian Federation and, as a result, the authorities of the Republic of Bashkortostan were not legally entitled to privatize Bashneft without obtaining the requisite consents from the Russian federal authorities. 

Upon the Prosecutor's request, the Arbitrazh Court has issued a freezing order on transactions with the Bashneft Shares which prevents Sistema and Sistema-Invest from dealing in the Bashneft Shares. 

The Civil Claim was listed for preliminary hearing on October 9, 2014 and the first hearing of the Civil Claim took place on October 23, 2014, which was adjourned until October 30, 2014, as indicated above. 

Sistema intends to defend its rights and lawful interests in court.

Criminal proceedings relating to the privatization of the BashTEK companies

In April 2014, a criminal investigation was commenced in respect of Mr. Ural Rakhimov (the son of Mr. Murtaza Rakhimov, who was the President of the Republic of Bashkortostan during the period when the BashTEK companies were privatized) and Mr. Levon Airapetyan. These persons have been accused of misappropriating the BashTEK companies via an illegal privatization process and have also been accused of legalization with respect to the BashTEK companies. 

On September 16, 2014, the majority shareholder and Chairman of the Board of Directors of Sistema, Mr Vladimir Evtushenkov was also charged with legalization with respect to the BashTEK companies. These charges stem from Sistema and Sistema-Invest's acquisition of the BashTEK Shares. On the same day, Vladimir Evtushenkov was placed under house arrest. 

Vladimir Evtushenkov maintains his innocence and intends to contest the charges. 

Current status

Sistema and Sistema-Invest are defendants to the Civil Claim. They have not been and cannot be charged with any criminal offenses under Russian law. 

Each of Sistema and Vladimir Evtushenkov are defending their rights and interests in the court proceedings using the legal remedies available to them. 

Sistema is taking all necessary steps in the best interests of Sistema and its stakeholders. 

Sistema will continue to issue updates on the information provided above and disclose relevant significant facts as they arise in accordance with the applicable requirements of law and stock exchange rules.

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For further information, please visit www.sistema.com or contact: 

Sistema is the largest publicly-traded diversified holding company in Russia and the CIS, which invests in and is a major shareholder of companies serving over 100 million customers in the sectors of telecommunications, high technology, oil and energy, radars and aerospace, banking, retail, mass-media, tourism and healthcare services. Founded in 1993, the Company reported revenues of US$ 8.2 billion for the first quarter of 2014, and total assets of US$ 41.5 billion as at March 31, 2014. Sistema's global depository receipts are listed under the symbol "SSA" on the London Stock Exchange. Sistema's ordinary shares are listed under the symbol "AFKS" on the Moscow Exchange. Sistema was ranked number 308 in the 2013 edition of the Fortune Global 500 list. Website: www.sistema.com

The Company is not an investment company, and is not and will not be registered as such, under the U.S. Investment Company Act of 1940. 

Some of the information in this press release may contain projections or other forward-looking statements regarding future events or the future financial performance of Sistema. You can identify forward looking statements by terms such as "expect," "believe," "anticipate," "estimate," "intend," "will," "could," "may" or "might" the negative of such terms or other similar expressions. We wish to caution you that these statements are only predictions and that actual events or results may differ materially. We do not intend to update these statements to reflect events and circumstances occurring after the date hereof or to reflect the occurrence of unanticipated events. Many factors could cause the actual results to differ materially from those contained in our projections or forward-looking statements, including, among others, general economic conditions, our competitive environment, risks associated with operating in Russia, rapid technological and market change in our industries, as well as many other risks specifically related to Sistema and its operations. 

This document does not constitute or form part of any offer or invitation to sell or issue, or any solicitation of any offer to purchase or subscribe for, any shares or other securities of JSFC Sistema and/or any of its subsidiaries and affiliated companies, nor shall any part of it nor the fact of its distribution form part of or be relied on in connection with any contract or investment decision relating thereto, nor does it constitute a recommendation regarding the shares or securities of JSFC Sistema and/or any of its subsidiaries and affiliated companies.