Surgutneftegas Responds to Harvard's Accusation

In respect of The Financial Times' publication "Harvard group to pursue Russian pay-out" the Press Service of OJSC "Surgutneftegas" would like to make the following statement.

Surgutneftegas holds the Harvard University in respect, but we are a Russian company, which abides by the law of the Russian Federation.

It is according to this law that the existing Charter of the Company was drawn up which expressly and clearly defines that the profit figure for distribution as dividends is determined by the Board of Directors and approved by the Shareholders' Meeting.

Before buying shares of a company, each and every investor or shareholder, whether a legal entity or a physical person, does familiarize with its statutory documents.

If president and fellows of Harvard College who are acting on behalf of their pension fund did not question this in 2002-2003, when they were acquiring the shares, why are they raising this question now?

We would also like to remind that Russian companies used to issue preferred shares not to raise capital but purely as an incentive for employees, whose salaries are still lagging far behind those of their western counterparts. Buying such shares the investors were aware of the fact that their money would not be used to develop production of the respective companies but to enrich the market speculators.

Secondly, by the year of 2002 Surgutneftegas had had an 8-years long dividend history, which the president and fellows of Harvard College could not help familiarizing with. The dividend history of Surgutneftegas demonstrates that the Company for production development purposes deducts capital investments from undistributed profit before distributing dividends. This was justified by Russian courts of all levels.

Why did the Harvard minority shareholders disregard this fact at the moment when they were buying the shares?

Thirdly, acting under its Charter and investing in the development of production, the Company has increased its oil output by 22 mn tons in the last five years. Due to investments into the reconstruction of its facilities, the Company enjoys the lowest wear and tear coefficient in Russia. Finally, the investments made have been advantageous to all shareholders, since the Company's capitalization has grown 300% in the last five years, with a preferred share value enjoying a ten-fold growth from $0.04 to $0.42 throughout the same period.

In terms of investments into production, currently the Company has no choice other than to invest through its profits. Unlike US companies, Russian enterprises are not allowed to decrease the tax burden through exploration, drilling, and construction costs included into costs of production. What makes matters worse is that under the Russian legislation, any investment project is charged heavily with a number of taxes. To mitigate the negative effects of the above factors, acting in its shareholders' interests and strictly within the law, the Company has always been boosting its investments. This policy lets the Company boast the strongest production, personnel, and financial potential among its Russian peers. No doubt, this potential is going to be realized to its fullest.

And finally, those, who are behind the article about the action brought against the Company to the Arbitration of New York, are sure to be aware of the fact, that under the Russian Laws in part of condition of being arbitrable, any action of the type is to be entertained solely in courts of the RF. They definitely know that because, being ADR-holders, they could not help reading that in the Depository Agreement.

Most probably, the information on the action brought by minority shareholders is just an attempt to heat the market.

We want to emphasize that the Company has always obeyed and obeys the law. Amendment to Law "On Joint Stock Companies" becoming effective on July 1, 2004, gives a definition to "net profit" for the calculation of dividends. The Company's future dividend policy will be in the line with the above mentioned Amendment.

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