Gazprom Lifted To 'BBB'; Outlook Stable; Gazprom Neft Affirmed; Outlook Pos; Both Off Watch

/Standard & Poor's, Moscow, November 29, 06/ - Standard & Poor's Ratings Services said today that it raised its long-term corporate credit rating on Russian gas company OAO Gazprom to 'BBB' from 'BBB-', following its review of government influence on a number entities related to the government of the Russian Federation (foreign currency BBB+/Stable/A-2; local currency A-/Stable/A-2; Russia national scale 'ruAAA'). The outlook is stable. At the same time, Standard & Poor's affirmed its 'BB+' long-term corporate credit and 'ruAA+' Russia national scale ratings on Gazprom's 76% subsidiary, JSC Gazprom Neft. The outlook is now positive. All ratings were removed from CreditWatch, where they had been placed with positive implications on Nov. 15 and 16, 2006, together with the ratings on several other Russian government-related entities (GREs). "The upgrade of Gazprom does not reflect any change in our view of the company's stand-alone credit quality, which we assess to be equivalent to BB+', but rather two notches of uplift--instead of one previously--for likely extraordinary state support in case of distress, as the company's links with the government become tighter," said Standard & Poor's credit analyst Elena Anankina. We believe the government is willing to support Gazprom based on the following key factors: - Gazprom fulfils an important public policy role by supplying about 41% of the country's energy requirements at very low regulated prices. - Gazprom provides about 14% of federal tax revenues and about 13% of Russia's exports--including all gas. - Gazprom enjoys strong access to international financial markets; its default would be a reputational blow for the government. - Russia has made "resource nationalism" a priority; therefore, the government is demonstrating increased willingness to support Gazprom, through access either to profitable business opportunities or liquidity from state- controlled financial institutions, or even potentially through extraordinary actions. As one of the government's key tools in acquiring control over strategic assets and projects, Gazprom plays an increasingly important role in Russia's foreign policy. The government's considerable ability to offer financial support is highlighted by its substantial liquidity reserves and the growing size of state-owned banks, which could be used to provide Gazprom with liquidity, if unavailable in the market We continue to use a bottom-up approach to determine Gazprom's corporate credit rating. The differential with the sovereign credit rating on the Russian Federation reflects Gazprom's position as a largely commercial entity, only just majority owned by the state (50.002%), and the still considerable liabilities compared with the size of the overall Russian economy. At March 31, 2006, Gazprom had $30.6 billion in on-balance-sheet debt, $1.5 billion in guarantees, about $6.6 billion in postretirement liabilities, and $600 million in asset retirement obligations, compared with $9.3 billion in cash and liquid assets. Both the positives and negatives of state influence are factored into our 'BB+' stand-alone rating on Gazprom: the plus of vast access to new business opportunities, but also the minuses of heavy social and investment mandates (notably, low domestic gas prices and debt-financed strategic acquisitions). The global scale rating on Gazprom Neft is based on a top-down approach with respect to its parent, and is now two notches below that on Gazprom, compared with one notch previously. "Gazprom Neft is currently less important to the state than its parent, and we do not believe that state support for Gazprom would necessarily be extended to the same degree to this oil subsidiary," said Ms. Anankina. Still, Gazprom Neft is Gazprom's key strategic oil subsidiary and will likely be subject to cross default on Gazprom's MTNs, which increases Gazprom's economic incentive to support the subsidiary if needed. "Gazprom's rating evolution will be largely driven by changes in ongoing and extraordinary state support, including increasingly politicized decision making regarding investment in new projects, acquisitions, and gas exports, and any government decisions that would allow gas prices to rise in Russia," added Ms. Anankina. We will continue to monitor Russia's evolving energy policies and the state's willingness to support important GREs like Gazprom politically, economically, and socially (using either its own liquidity reserves or those of state-related banks), as well as its willingness to create clear mechanisms for such support in the future. Very large debt-financed acquisitions could pressure the rating if not offset by growing actual or anticipated state support. "The positive outlook on Gazprom Neft reflects our expectation that the rating could be raised if Gazprom buys out the minority shareholding in its subsidiary, which will be possible during Yukos' liquidation, and if Gazprom Neft is more closely integrated into the Gazprom group," said Ms. Anankina. "Whether any rating differential with the parent would be maintained if such a situation materialized, or the rating would be equalized with that on Gazprom, would also depend on the relative status of Gazprom Neft's creditors compared with that of the parent's. Credit analysts: Elena Anankina, Moscow, (7) 495-783-4130 elena_anankina@standardandpoors.com Tatiana Kordyukova, Moscow, (7) 495-783-4131; tatiana_kordyukova@standardandpoors.com CorporateFinanceEurope@standardandpoors.com [2006-11-30]