Standard & Poor's Ratings Services said today it placed its 'B' corporate credit and senior unsecured ratings on Russia-based state-owned company OJSC Oil Company Rosneft on CreditWatch with developing implications following its acquisition of OOO Baikal Finance Group (Baikal), the winner of the tender for a 76.8% stake in Yuganksneftegas (Yugansk), a former production subsidiary of Russian oil company OAO NK Yukos (CC/Watch Neg/--).

At the same time Standard & Poor's stated that its 'BB-' long-term corporate credit and senior unsecured debt ratings on Russian gas company OAO Gazprom and related entities remain on CreditWatch with developing implications. The ratings on Gazprom were initially placed on CreditWatch on Nov. 30, 2004, following the group's announcement that it intended to bid for Yugansk.

The CreditWatch actions reflect major uncertainties regarding the financing of the acquisition and the tax and litigation risks associated with Yugansk. Standard & Poor's is also concerned about the potential effect of the acquisition on the ongoing merger between Rosneft and Gazprom and on the financial positions of both entities. It is unclear if the companies would receive any government financial support to offset the increased risks.

Yugansk's auction price was $9.3 billion, of which $1.8 billion has already been paid by Baikal, with the remainder due in January 2005. Standard & Poor's notes that if the full amount is not paid, Yugansk might be nationalized.

The potential pressure on the ratings on Rosneft and--if the planned merger proceeds--on those on Gazprom comes from the risk of substantially higher leverage--particularly with regard to short-term debt--to finance the acquisition, and from the possibility that Rosneft breaches its debt covenants. Yugansk faces considerable tax claims and the litigation started by Yukos in the international courts constitutes further risk, particularly as it may affect Rosneft's and Gazprom's access to international banks, from which funds are needed to finalize the transaction, and therefore limit the companies' access to long-term financing.

Standard & Poor's will closely monitor any impact of the Yugansk acquisition on the timing and pattern of the implementation of the government plan to get a direct controlling stake in Gazprom by contributing state-owned Rosneft in exchange for Gazprom treasury stock. If Rosneft's valuation changes, Standard & Poor's is concerned that additional payments to be made by Gazprom would further increase the group's leverage.

The ratings on Gazprom and Rosneft could be raised if there is strong evidence of government support, such as the provision of long-term financing at reasonable terms, or of a restructuring of Yugansk's tax debt. The acquisition of Yugansk will benefit Rosneft's business profile, as it is one of the largest and most efficient assets in the Russian oil industry. Should the merger proceed, Gazprom would additionally benefit from a larger and more diversified asset base and--from the newly acquired oil assets--better resilience to low domestic prices compared with gas assets, as regulated domestic gas prices remain very low.

The CreditWatch status will be resolved when Standard & Poor's receives more information about the financing of the Yugansk acquisition and about the merger between Rosneft and Gazprom.