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S&P: Russia's Central Telecommunications Co. (OJSC) 'B+/ruA+' Ratings Affirmed; Outlook Stable

March 3, 2009 "Standard & Poor's"
MOSCOW (Standard & Poor's) March 2, 2009--Standard & Poor's Ratings Services said today it affirmed its 'B+' long-term corporate credit rating and 'ruA+' Russia national scale rating on Russian telecommunications operator Central Telecommunications Co. (OJSC) (CTC). The outlook is stable.

"The ratings remain constrained by the company's weak liquidity position, limited revenue diversification, and increasing competition, particularly in the rapidly expanding Moscow Oblast," said Standard & Poor's credit analyst Alexander Griaznov.

The ratings are supported by CTC's incumbent position, its vast network in European Russia's central region, and its ownership of last-mile Internet access to 6.7 million customers.

CTC's weak liquidity position remains the key rating constraint. Its existing cash balances and committed credit facilities do not fully cover its short-term debt. Nevertheless, we consider the company's proactive liquidity management to be positive because it is negotiating with multiple banks to refinance its largest maturity, scheduled for August 2009. We also expect to see positive free operating cash flow in 2009 and 2010.

CTC's effectiveness in optimizing its operations and improving profitability is highlighted by an increase in its EBITDA margin to 38% in 2008. This rise in profitability stems from substantial progress in headcount reduction, tighter spending controls, and gradual expansion of value-added services. We note, however, that revenue and EBITDA growth potential is limited, owing to limited tariff increases for basic telephony services and rising operational costs.

CTC has fairly limited revenue diversification, with about 67% of revenues coming from traditional telephony. The company's ability to materially expand in broadband and other high-growth segments, while withstanding the prospective expansion of leading competitors, is subject to execution risk. CTC's ability to further streamline its operations, improve its network, and prudently manage its financial flexibility remains crucial to preserving its credit profile.

"The outlook is stable because we are of the opinion that CTC will sustain its positive operating performance, continue to diversify its revenue base, and enhance its profitability." said Mr. Griaznov. "This includes the assumption that the company will continue to manage its liquidity proactively, avoiding risks to its near-term liquidity position."
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    Rostelecom - Center
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