On Feb. 4, 2003, Standard & Poor's Ratings Services raised its Russia national scale corporate credit and senior unsecured debt ratings on JSC Concern Kalina (Kalina), Russia's largest cosmetics manufacturing company, to 'ruBBB-' from 'ruBB+'.

The rating action reflects the growth of the Russian cosmetics market, as well as Kalina's ability to retain its leading market position and the company's stronger liquidity due to access to long-term financing.

The ratings on Kalina reflect expectations that the company's sales will grow in line with the market and its working capital will decrease in the first six months of 2003. Standard & Poor's will closely monitor the dynamics of the company's sales and working capital, as well as the quality of any acquisitions.

The ratings are constrained by intensifying competition with international cosmetics companies in Russia, heightening advertising costs and working capital, exposure to foreign-currency risk because of planned dollar-denominated debt, and seasonality and volatility of the cosmetics and health care products industry.

Kalina benefits from maintaining its strong market positions (in particular, its number-one position in skin care and oral care products with 30% and 19% market shares, respectively, in terms of volume), an increasing share of branded products, efficient marketing, and a strategic focus on average-income Russian consumers with some residual share in the low-income category.

Growth in personal incomes in the country, however, has led consumers to switch to the more expensive end of the market, where large international companies are aggressively increasing their presence in the Russian market, and competition remains the key risk for the company. The strengthening ruble is also gradually reducing Kalina's cost advantage through access to cheaper local labor and supplies.

Kalina is exposed to significant volatility and various working-capital outlays, which were the key reasons for negative free cash flow in 2001-2002. A significant working capital outlay in 2002, however, was also partly due to the temporary effect of the company's restructuring of its supply and distribution system, while in the longer term this program should help Kalina to optimize its raw materials and goods flows, make its working capital more manageable, and respond more promptly to market changes in consumer demand.

The company's growth strategy is aggressive, which may call for additional debt in order to finance working capital and mergers and acquisitions. Although the company's policy in this area was rather prudent in 2002, Standard & Poor's will monitor the quality of any new debt-financed acquisitions.

Liquidity.

Kalina's liquidity improved significantly in 2002, and the company was able to replace the majority of its short-term debt with long-term bonds and bank loans. At the same time, the share of foreign currency-denominated debt will rise in addition to an increasing share of dollar- and euro-denominated costs compared with ruble sales, thereby escalating Kalina's exposure to currency risk.

Kalina's liquidity position is underpinned by about $10 million of available ruble bank lines and a $20 million loan from the European Bank for Reconstruction and Development (foreign currency AAA/Stable/A-1+). This loan is subject to financial covenants, although Kalina should remain comfortably in compliance with these requirements. Recent initiatives to obtain long-term funds from Russian and foreign banks are positive steps that help to extend the company's debt maturity. Potential asset sale proceeds could also provide additional sources of liquidity.

Ratings List

To From

JSC Concern Kalina

• Russia national scale corporate credit rating

ruBBB- ruBB+

• Russia national scale senior unsecured debt

Complete ratings information is available to subscribers of RatingsDirect, Standard & Poor's Web-based credit analysis system, at www.ratingsdirect.com. All ratings affected by this rating action can be found on Standard & Poor's public Web site at www.standardandpoors.com; under Fixed Income in the left navigation bar, select Credit Ratings Actions. Alternatively, call one of the Standard & Poor's Ratings Desks: London (44) 20-7847-7400; Paris (33) 1-4420-6705; Frankfurt (49) 69-33-999-223; Stockholm (46) 8-440-5916.

Analyst E-Mail Addresses

tatiana_kordyukova@standardandpoors.com

elena_anankina@standardandpoors.com

CorporateFinanceEurope@standardandpoors.com

ruBBB- ruBB+

Addition information you can get at press-secretary of Concern “Kalina”

Sergey Kazanzev, tel/fax. (3432) 65-83-06, e-mail: pressa@kalina.org