RATINGS RATIONALE

"The confirmation of MegaFon's Baa3 rating reflects our expectation that, despite its financial metrics having deteriorated beyond the thresholds set for the current rating, the company will be able to restore these over the next 12 months to levels that we view as commensurate with its investment-grade rating," says Artem Frolov, an Assistant Vice President -- Analyst and lead analyst for MegaFon. "Given MegaFon's lack of track record of adhering to its newly announced conservative financial policy, we recognise that there is a degree of uncertainty surrounding the company's ability to restore the metrics and the pace of recovery, which is reflected by the negative outlook on the rating."

Having deteriorated following MegaFon's debt-financed extraordinary dividend payout and purchase of shares in April 2012, Moody's expects the company's financial metrics to improve materially over the next 12 months. This improvement would be supported by the company's continuing strong operating performance, as well as cost-saving measures and reduction in capital expenditure from 2012.

The rating agency takes some comfort from the management's commitment to maintain MegaFon's investment-grade credit rating. This commitment is reflected by MegaFon's public financial policy, which anticipates that the company will consider the financial metrics thresholds set by Moody's for its investment-grade rating when deciding on the amount of dividend payouts to its shareholders.

MegaFon's rating continues to reflect its (1) strong market position and the potential for organic growth due to its advancement in mobile data services and fixed-to-mobile convergence opportunities; (2) sustainable operating performance and cash flow generation; and (3) strong liquidity and long-term debt maturity profile.

The rating also factors in (1) a high SIM-card mobile penetration rate in Russia (more than 160% as of September 2012 according to Advanced Communications and Media, a research agency), which limits the potential for further organic growth; (2) MegaFon's high churn rate, which is typical for mobile operators in Russia and is mitigated by low subscriber acquisition costs; and (3) the company's overall exposure to an emerging market operating environment that is characterised by a less developed regulatory, political and legal framework.

The negative outlook on MegaFon's rating reflects uncertainty over the pace of recovery of the company's financial metrics to the levels commensurate with the guidance for the Baa3 rating, as there is no track record of the company demonstrating the priority of capping its leverage at the levels required by Moody's for the investment-grade rating level, over shareholders' potential dividend requirements.

WHAT COULD CHANGE THE RATING UP/DOWN

Moody's does not envisage positive pressure being exerted on the rating in the intermediate term. However, the outlook could be stabilised if MegaFon's adjusted total debt/EBITDA declines below 1.5x and its adjusted RCF/debt rises above 45% as of year-end 2013 on a sustainable basis, while the company maintains its solid liquidity and strong market position.

Moody's could downgrade the rating if MegaFon's financial metrics do not demonstrate a clear recovery trend over the next 12 months, with adjusted total debt/EBITDA declining below 1.5x and adjusted RCF/debt rising above 45% as of year-end 2013 on a sustainable basis. Downward pressure could also be exerted on the rating if MegaFon's operating profile, market position or liquidity were to deteriorate materially.

PRINCIPAL METHODOLOGY

The principal methodology used in rating MegaFon OJSC was the Global Telecommunications Industry Methodology published in December 2010. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

MegaFon OJSC is the second-largest mobile operator in Russia, with nearly 63 million subscribers as of September 2012. The company operates in all of Russia's 83 regions and is also present in Tajikistan, Abkhazia and South Ossetia. It offers mobile services under the GSM, EDGE, GPRS, 3G and 4G/LTE standards, with its 3G network rolled out in most Russian regions and 4G/LTE-based services offered in 21 Russian cities. In the past 12 months to 30 September 2012, MegaFon generated revenue of RUB267 billion (around $8.6 billion) and adjusted EBITDA of RUB127 billion (around $4.1 billion).

In November 2012, MegaFon completed an IPO on the London Stock Exchange and the Moscow Interbank Stock Exchange. After the IPO, if no over-allotment option is exercised, a stake of 50% plus 100 shares in MegaFon would be owned by AF Telecom (unrated), controlled by Mr. Alisher Usmanov, 25.97% by TeliaSonera AB (A3 stable) and 10.4% by MegaFon itself, with 13.63% in free float. In the event of the full execution of the over-allotment option under the IPO, TeliaSonera's and MegaFon's stakes would decrease to 25.0% plus 100 shares and 10.0%, respectively, while the free float would increase to 15.0%. Also, within 30 days following the IPO, MegaFon's CEO, Mr. Ivan Tavrin, may purchase a 1.25% stake under his individual incentive plan, in which case MegaFon's stake would decrease to 8.75%.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides relevant regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides relevant regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides relevant regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

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Artem FrolovAsst Vice President - Analyst Corporate Finance Group Moody'sInvestors Service Limited, Russian Branch 7th floor, Four Winds Plaza21 1st Tverskaya-Yamskaya St.Moscow 125047 RussiaDavid G. Staples MD - Corporate Finance Corporate Finance Group Telephone: 00971 4237 9536 Releasing Office: Moody's Investors Service Ltd. One Canada SquareCanary WharfLondon E14 5FA United Kingdom JOURNALISTS: 44 20 7772 5456 SUBSCRIBERS: 44 20 7772 5454 (C) 2012 Moody's Investors Service, Inc. and/or its licensors and affiliates (collectively, "MOODY'S"). All rights reserved.

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