Fitch Ratings-London-29 March 2004: Fitch Ratings, the international rating agency, has today upgraded Dalsvyaz's Senior Unsecured foreign currency rating to 'B' from 'B-' (B minus), and changed the rating Outlook to Positive from Stable. At the same time, the agency has affirmed Dalsvyaz's Short-term foreign currency rating at 'B'.

The upgrades reflect the company's strong market position as an incumbent provider of fixed-line telephone services in the Far Eastern region of Russia. Since its merger with six regional operators at end-2002, Dalsvyaz's scale of operations has significantly increased providing the company with additional financial flexibility.

The level of leverage is modest, and although leverage metrics are projected to somewhat deteriorate in the future nevertheless they fully correspond to Dalsvyaz's ratings. During 2003 Dalsvyaz extended maturity profile of its debt while its cash position should significantly improve after receiving payments totalling USD39.9 million from its stake sale in the regional GSM and NMT-450 providers.

The ratings also take into account Dalsvyaz's very low exposure to mobile business, which curtails its growth opportunities and deprives it of any potential benefits from fixed/mobile integration. Moreover, profitability of the fixed-line business remains low. Fitch does not see Dalsvyaz in a position to successfully develop the mobile business even if the company receives a broader mobile license or acquires a regional mobile telecom.

Its large territorial spread/low population density operating profile makes Dalsvyaz a relatively high cost telecom provider compared to its Russian peers, hence limiting its potential profitability upside. Its EBITDA margin is significantly lower than other super-regional telecoms. Dalsvyaz's tariffs on its key services including long-distance and local rates are regulated, which exposes the company to high uncertainty over its future rate structure, and curbs its ability to grow revenues and cash flows. At present, tariffs on local services are set below cost, forcing the company to cross-subsidise between various business segments.

Dalsvyaz expects that gradual tariff hikes will help it to break even in the local services segment by 2007, although the regulator has not made any tariff increase commitments. Current tariffs are on average equal or higher than in many other regions of Russia, making the regulator reluctant to hike them further. Dalsvyaz's capex was significantly increased in 2003, and is projected by the management to grow further in 2004 and remain high in the future. Fitch notes that the announced capex and expansion plans in the mid-to long-term are based on the expectation of continuous high demand for new installations in the fixed-line segment that are yet to be tested. These capex plans suggest that Dalsvyaz will build up the level of debt on its balance sheet. Unless the debt is supported by rapid growth in revenues and operating cash flows, it may expose Dalsvyaz to significant refinancing risks over the medium-term. Fitch expects the company will return to net free cash flow positive in the longer-term when capex moderates as new fixed line installations satisfy the pent-up demand.

The ratings also reflect the dominant influence of the company's majority shareholder, Svyazinvest, on the key management composition and strategic decision making process at Dalsvyaz. Fitch expects that Svyazinvest will continue to exert its influence in the future.

CONTACTS:

Nikolai Lukashevich, London, Tel: +44 (20) 7862 4103, e-mail: nikolai.lukashevich@fitchratings.com

Raymond Hill, London, Tel: +44 (20) 7417 4314, e-mail: raymond.hill@fitchratings.com

Media Relations: Alex Clelland, London, Tel: +44 20 7862 4084.