Fixed-Line Sector: Uralsvyazinform - The Regions Are Calling

Fixed-line telephony has enormous potential …

¦ Cellular is meeting Russia’s immediate needs for telephone service, but ultimately it cannot serve as a replacement for fixed lines. Going forward, business and consumer demand for data traffic will drive demand for fixed lines.

…but regional telecom operators are short of cash

¦ Operators are forced to rely on low monthly line rentals for funding. We believe the growth of regional operators is dependent on the privatization of Svyazinvest, which will encourage IPO/secondary issues on the capital markets to fund increased capex.

Svyazinvest – the key to unlocking growth

¦ We think the most favorable window to carry out Svyazinvest’s privatization will be in 2H06/1Q07. Should this be missed, 2009 becomes the next possible date. This will be too late, we believe, for Russia’s economy.

¦ The best regional operators prior to privatization will still be the most valuable post-privatization, and these are the ones to buy.

We believe Uralsvyazinform is the most attractive regional operator …

¦ We are launching coverage of all regional operators and begin with Uralsvyazinform. Due to the potential for economic growth in its home region, effective management, and its dominance of the local cellular business, we consider it the strongest of the regional operators.

…and its shares are deeply undervalued

¦ We value the company at USD13.9 per Level 1 ADR, but then conservatively discount the price to a target of USD11, or roughly 55% upside.