OREANDA-NEWS. April 14, 2010. Moody's Investors Service assigned a Ba3 corporate family rating to OAO Far East Telecom ("FET" or "the company"), the leading incumbent fixed-line telecommunications operator in the Far East Federal District of Russia and the Republic of Yakutia. Concurrently, Moody's Interfax Rating Agency has assigned an Aa3.ru national scale rating to the company. Moscow-based Moody's Interfax is majority-owned by Moody's, a leading global rating agency. The outlook on the ratings is stable. This is the first time that Moody's rates the company.

Under Moody's rating methodology for government-related issuers (GRIs), FET's Ba3 corporate family rating is based on the following inputs: (i) a Baseline Credit Assessment (BCA) of 14 (on a scale of 1 to 21, where 1 represents the lowest level of credit risk), which reflects Moody's standalone credit assessment of FET, i.e. independent of any credit benefit the overall family derives from its GRI status; (ii) the Baa1 local currency rating of the Russian government, with a stable outlook; (iii) medium support; and (iv) medium dependence.

The BCA of 14 (equivalent to a B1 rating) reflects the company's position as an incumbent fixed-line operator in the Far East district and Yakutia. As the regional incumbent operator, FET is mandated by the government to provide basic telecoms services to the local population in accordance with the terms and tariffs specified by the state.

The BCA is supported by: (i) the company's dominant position in its key traditional voice telephony market in the region, underpinned by its ownership of the backbone infrastructure; (ii) the relatively benign legislative environment and the absence of any immediate threat of local loop unbundling; (iii) the company's strong positions in the developing broadband market; (iv) FET's robust financial performance and relatively low leverage; and (v) its strong management team and conservative approach to financial policies.

However, the BCA is constrained by: (i) the company's relatively modest revenue base; (ii) the growing competition from altnets and mobile operators, (iii) the risk of fixed-to-mobile substitution; (iv) the potential pressure on the traditional fixed line segment should future state-approved tariff increases lag behind inflation, (v) the company's concentration on the residential market with a low presence in the more lucrative corporate segment; (vi) limited growth potential due to the regional specifics, such as low population and negative population growth due to outward migration, significant unemployment rates, and significant geographical dispersion of urban agglomerations.

The medium level of dependence reflects Moody's assessment of the financial and operational linkages between the government and FET, the extent to which both the government and the company rely on the same revenue, and their linked exposure to credit risks.

The medium level of support reflects Moody's view of FET as a strategic asset ultimately controlled by the

government via Svyazinvest, a holding company 75%-owned by the state and created for the sole purpose of developing Russia's telecommunications business. Given the Russian government's announced plan to create a national integrated telecommunications operator via consolidation of the regional assets owned by Svyazinvest by 2012, Moody's expects the support function to further strengthen as the regional operators' treasury and planning functions are delegated to the corporate centre controlled by the state. The medium support assessment also incorporates the history of Russian government bailouts and economic intervention, including in particular in the telecommunications industry.

Moody's views favourably FET's limited competition in the relatively stable residential voice service segment, where it has a market share of 87% and benefits from its ownership of the extensive backbone infrastructure with a digitalisation level of above 80%. In addition, FET enjoys leading positions in the intrazonal communications segment (89% and 100% market shares in the Far East and Yakutia, respectively), although it is experiencing an annual decline in traffic of around 6-8% in this segment. The area in which FET is most under pressure from competition is the operators' interconnection market, where traffic has been seen migrating from the incumbent players to the alternative networks and mobile operators due to more attractive pricing.

FET's strategy envisages further development of the non-regulated value-added services primarily focusing on the increase in average revenue per line. The company is number one in the Far East and Yakutia in terms of the broadband market share (73% and 83.4%, accordingly), and is actively developing its pay-TV business.

Although technically Moody's considers FET an integrated operator, it recognises that its cellular network is relatively small with a low market share, makes a limited contribution to the company's revenue base and faces severe competitive pressures. FET's cellular network has a capacity of 525,000 and covers four districts: Magadan, Primorie, Kamchatka, and Chukotka and Sakhalin. It has relatively stable subscriber numbers (estimated at 347,000 as at end-2009) but demonstrates declining ARPU and revenue. The company does not envisage significant capex outlays aimed at expanding or promoting this business segment, but is rather focusing on potential synergies from fixed-tomobile convergence solutions and bundling of services.

The stable outlook reflects Moody's expectation that the company will maintain its prudent debt management strategy and satisfactory liquidity profile and maintain its business positions.

Going forward, positive business profile developments could, if accompanied by a strong financial performance, have positive rating implications. Moody's will assess structural changes in the company's organisation following the restructuring of Svyazinvest for their impact on the company's standalone credit profile and support/dependence considerations. The company's ratings could also be impacted by any changes in the ratings of the Russian government.

For the assignment of the rating, Moody's has used its methodology for the Global Telecommunications Industry, which can be found at www.moodys.com in the Rating Methodologies sub-directory under the Research & Ratings tab. Other methodologies and factors that may have been considered in the process of rating these issuers can also be found in the Rating Methodologies sub-directory on Moody's website.

NATIONAL SCALE RATINGS

Moody's Interfax Rating Agency's National Scale Ratings (NSRs) are intended as relative measures of

creditworthiness among debt issues and issuers within a country, enabling market participants to better differentiate relative risks. NSRs in Russia are designated by the ".ru" suffix. NSRs differ from global scale ratings, as assigned by Moody's Investors Service, in that they are not globally comparable to the full universe of Moody's rated entities, but only with other rated entities within the same country.