Although analysts tend to make more frequent use of the acronym BRIC (Brazil, Russia, India and China) to designate the countries which will likely become leading economic powers in the 21st century, this block has still not been officially formed, i.e. no meetings are held under the aegis of BRIC and no regulations exist to govern its activity, etc..

Nonetheless, BRIC should not be treated as something ephemeral. Bilateral and trilateral meetings of these countries have been conducted more often in recent months. They focus not only on economic cooperation, but also political issues.

This June the first trilateral meeting between the foreign ministers of Russia, India and China was held in Vladivostok. The ministers adopted a decision to set up an expert group and task it with preparing recommendations for cooperation in the area of hi-tech, energy, transport and agriculture. Moreover, Russia and China backed India’s application to obtain the status of a permanent member of the UN Security Council.

A little earlier, in mid-May, a visit to Moscow was paid by the delegation of high-ranking officials of the Common Market of the South America, Mercosur. The delegation was headed by the chairman of the Committee of Permanent Representatives of the Mercosur Eduardo Duhalde, ex-president of Argentina. In addition, there were 6 top-ranking officials from Brazil, Argentina and Uruguay in the delegation, and also 18 big businessmen from South America who represented food processing, hi-tech and biotech entities.

Russian PM Mikhail Fradkov, chairman of the Russian Security Council Igor Ivanov and Economic Development and Trade Minister German Gref, represented Russia at the meeting of the above delegation. One of the main issues discussed at the meeting was cooperation in the hi-tech and energy sectors.

As we can see, although these events are not covered by leading international news agencies, they are in full swing. Moreover, they are on solid footing since they are underpinned not by populist or Utopian aspirations of politicians, but by mutually beneficial economic cooperation.

In our view, investors should devote special attention to the Russian utility industry. Challenging opportunities can be provided by projects to export electricity from Russia to China and India, as well as the erection of new power generation facilities (HPPs, NPPs, etc.).

Those interested in utility news and research reports on power entities can visit our website by clicking here.

Mikhail Aristakesyan
Expert, "FINAM"
Russian Brokerage Company
http://www.fin-rus.com

The Russian equity market saw sluggish trading on thin volumes Friday. Bullish global oil prices and strong ADRs were the only saving grace which came to the rescue of domestic stocks.

On a neutral news flow, players were pleased to see that the BoD of Gazprom finally endorsed the buyout price at which the state is to subsequently consolidate a controlling stake in the gas monopoly. Investors are mainly interested in seeing the ring fence lifted, which means that not much upside is to be expected until Gazprom’s shares are actually assigned to the state. The bulls are hopeful that this will happen before the gas monopoly’s June 24 AGM and if it does then a big stride on the road to liberalization will have been made.

The range of RTS blue chip gainers varied from +0.1% (Surgutneftegaz) to +1.42% (Lukoil). The RTS Index advanced 0.33% to 681.59 on average volumes totaling $17.5 mln.

MICEX was a little more bullish on Friday, with the list of advancers ranging from +0.09% (Sberbank) to +1.8% (UES). On the other end of the spectrum, Mosenergo (-0.73%) finished in negative territory. The MICEX Index added on 1.94% to close at 619.97 on thin volumes equal to $690.89 mln.

Gazprom was fractionally down on SPICEX, with a 0.1% downtick to Rub 83.35 and 6.5 mln shares changing hands.

FINAM
Russian Brokerage Company
http://www.fin-rus.com

The stock markets of developed countries are traditionally considered to be less risky than emerging equity markets. This means that they are a locomotive of global economic growth, supposedly less volatile, less exposed to various crises, more successful in safeguarding investor rights, operate more developed infrastructure, offer higher margins, etc.

This is actually the case if we take a look back at history. However, going by the current geo-economic trends, they will allow us to make reasonable assumptions that this situation will turn around in the near future. As a matter of fact, a paradigm shift is already in progress.

Nowadays many developing countries post economic growth rates which are higher than those in developed countries. A growing number of analysts speak about BRIC (which stands for Brazil, Russia, India and China) as the main global economy driver in the 21st century.

The United States has consistently posted the highest growth rates among developed nations. However, their growth model is currently based on a shaky footing which could evaporate at any given time. The point is that unlike the sustainable growth model which is based on savings which are invested in business the United States relies on borrowed funds which are mainly spent on or used for maintaining “bubbles” on capital markets. Suffice it to say, the US currently needs 80% of global savings to avoid a crisis.

The focus on a socially-oriented country is the main obstacle which prevents continental Europe from achieving economic growth. High taxes, rigid labor laws, etc., more often prompt companies to relocate their production facilities to developing countries. The most talented and ambitious Europeans leave their countries in order to set up businesses and live in jurisdictions with more favorable tax regimes. The intensification of these trends could result in lower tax revenues and, consequently, social unrest.

At the same time, developing nations use foreign investments to establish enterprises and, consequently, new jobs, thereby contributing to economic growth. The advantages of developing countries are plain to see from the vantage point of the layman. If the man on the street of a developed nation prefers to work less and buy more, then in developing countries the picture is quite the opposite: due to widespread poverty and unemployment people are eager to work 12 hours a day for low wages, by Western standards. This understandably has a beneficial impact on economic growth.

In our view, any investor who currently picks stocks for his portfolio should take a closer look at developing countries, Russia in particular. The Russian stock market has P/E equal to 6.3 and is one of the most undervalued worldwide by this metric.

Mikhail Aristakesyan
Expert, "FINAM"
Russian Brokerage Company
http://www.fin-rus.com

Russian investment holding FINAM (www.fin-rus.com) is pleased to
announce the release of a brand new powerful English Internet resource
devoted to the Russian stock market. All information will be posted in
the form of a blog, which is the most popular form of Internet
communication today (http://finam.blogspot.com). FINAM is committed to
providing international investors with the broadest possible range of
web content needed to achieve success in trading on the Russian equity
market.

At present, the Russian equity market is one of the most undervalued
marketplaces in the world with a 6.3 P/E ratio.

P.S. In spite of launching our corporate blog I will continue to post
here daily reviews and the most interesting articles from my point of
view.

Monday’s equity trading session was sluggish on light volumes marked by mostly speculative deals. Most blue chips were leaning to the upside, though, predominantly on recording-setting global oil prices. WTI hit $58 per barrel, which is an all-time record since the 1983 opening of NYMEX, leaving the previous April 1 high of $58.27 behind and expectations that crude futures will likely break through the $60 mark later in the week.

Gazprom investors were moderately downbeat in the wake of a statement from Russian President Vladimir Putin that the gas giant should spend at least $ 1 bln on the gasification of remote areas in the country. Needless to say, this unexpected and onerous expenditure will hinder Gazprom from taking over some effective and highly capitalized asset(s), as investors had been hoping.

Most RTS blue chips fell within a range varying from +0.08% (NorNickel) to +1.33% (UES). The RTS Index advanced by 0.7% to 690.23 on thin volumes totaling $9.9 mln.

The mood was a bit more lackluster on MICEX with most blue chips closing within a band ranging from +0.06% (UES) to +1.15% (Mosenergo). The list of decliners included Tatneft (-0.19%), NorNickel (-0.35%) and Sberbank (-0.4%). The MICEX Index edged up 0.1% to 624.66 (+0.1%) on light trading volumes amounting to $532.28 mln.

On the SPICEX front, Gazprom gave up 0.35% on President Putin’s statement, finishing at Rub 83.06 with 4.4 mln shares changing hands.

FINAM
Russian Brokerage Company
http://www.fin-rus.com

Yesterday the oil major’s general director Vladimir Bogdanov unveiled the company’s new operating targets: to extract 66.5 mln tons of oil in 2005 up from 63.7 mln tons announced earlier. In addition, Bogdanov reported that the drafting of the feasibility study for erection of a refinery in Primorsk (Leningrad region) will be finalized by mid-2006 and the construction of the Talakan – Ust-Kut crude oil pipeline is scheduled for completion by summer 2008.

Overall, this piece of news is a strong positive for the company. However, taking into account the contraction in the company’s recoverable reserves increment in 2004 and high capital intensity and uncertainty over its new projects, we reiterate our Hold recommendation on Surgut’s shares with a fair price of $0.74 per common share and $0.54 per preferred share, respectively.

FINAM
Russian Brokerage Company
http://www.fin-rus.com

In 2004 Russia saw the “birth” of 4,000 new millionaires which brought the total number to 88,000. The rise is due to growth in the Russian economy. This figure is given in the annual World Wealth Report released by Merrill Lynch investment bank and CapGemini consulting firm.

The results of this survey once again underscore some of my assumptions voiced in my previous article “Are Emerging Markets a Risk Venture?”.

This topic relates to the different lifestyles of citizens in developing and developed countries. The former opt to work hard and make fortunes, while the latter tend to consume. If we take a look at Chart 2, we’ll see that the United States and Great Britain rank 8th and 9th, respectively, in the Top 10 G7 nations in terms of growth in the number of High Net Worth Individuals (HNWI). Given this ratio, their number is only half as much as in the three leading countries: Singapore, South Africa and Hong Kong, with an annual HNWI growth of 22.4%, 21.6% and 18.8%, respectively.

Chart 1. HNWI Population Growth by Country, 2003 – 2004


Secondly, this is a comparison of GDP growth figures in G7 and BRIC. As Chart 2 clearly shows, BRIC economies show much higher growth rates than those in G7. For example, Russia’s GDP grew 7.1% in 2004, whereas the US saw its GDP rise 4.4% and the German economy grew by a mere 1.6%.

Chart 2. | Real GDP Growth in Selected Economies, 2003 – 2004


BRIC is currently home to 41% of the global population, but it accounts for a mere 8% of global GDP. However, according to forecasts by Goldman Sachs, their GDP will exceed that of G7 nations by 2040. As the Biblical proverb goes “And the last shall be first.”

Mikhail Aristakesyan
Expert, FINAM
http://www.fin-rus.com

Tuesday’s trading session was even more low-key than Monday’s. The lack of domestic drivers and the decline in Western indexes made investors shy away from buying. On the downside, energy stocks took a drop on recent pronouncements from UES CEO Anatoly Chubais that some high-voltage grid assets are to be handed over to the Federal Grid Company and a shift in priorities towards Russian investment projects.

Continuous revisions to UES strategy add even more uncertainty to the future track of the reform process, which has investors feeling quite uneasy. And the icing on the cake was another blackout in the South West of Moscow on Tuesday morning, which is the second such instance in the last month.

Most RTS blue chips were heading south on Tuesday. The list of decliners included NorNickel (-0.41%), and bellwether UES (-0.82%) while the top gainers were Rostelecom (+0.94%) and Lukoil (+0.03%). The RTS Index edged back 0.04% to 690.04 on average volumes amounting to $17.2 mln.

MICEX blue chips were a bit less upbeat, with the list of decliners ranging from -0.15% (Surgutneftegaz) -1.4% (Tatneft). On the other end of the spectrum, Rostelecom (+1.05%) finished in positive territory. The MICEX Index pulled back 0.58% to 621.02 on average trading volumes totaling $761.24 mln.

Meanwhile, Gazprom experienced a major correction on SPICEX, declining 1.28% to Rub 82 with 9.5 mln shares changing hands.

FINAM
Russian Brokerage Company
http://www.fin-rus.com

Pyaterochka, one of the biggest Russian retailers, issued a press release on the London Stock Exchange that it intends to acquire 18 of Kopeika’s 24 sales outlets in St. Petersburg for $60.8 mln. If the deal is transacted, Pyaterochka will add 7,200 sqm to its total retail space. The transaction is expected to be wrapped up in July. As a result of this deal Pyaterochka will boost the number of its St. Petersburg-based stores to 140. Kopeika discount chain, registered in St. Petersburg, is owned by KiT.

The above acquisition will allow Pyaterochka to strengthen its positions in Saint Petersburg. If we assess the price Pyaterochka will pay per sqm of Kopeika’s sales outlets, the transaction price seems to be higher than it should be. However, given Kopeika’s high turnover (over $100 mln a year), this deal turns out to be profitable for Pyaterochka, since the acquisition price of one store is far below Kopeika’s annual average turnover.

FINAM
Russian Brokerage Company
http://www.fin-rus.com

Wednesday’s trading session was subdued again on another round of thin volumes. Investors were still waiting for Rosneftegaz to compete the acquisition of Gazprom’s shares. The market mood was largely speculative on a statement by German Gref that the state could consolidate its controlling stake in Gazprom before the June 24 AGM

What’s more, Gazprom shareholders are expected to approve a $3 bln loan from Sberbank and Vneshtorgbank. This credit facility seems logical taking into account the onerous expenses ahead, all the more since the gas monopoly will receive cash from the state for its shares no earlier than year-end 2005.

Most RTS blue chips finished up within a band ranging from +0.13% (UES) to +1.69% (Surgutneftegaz). On the negative end of the spectrum was Mosenergo (-0.67%). The RTS Index advanced by 0.86% to 695.94 on above-average volumes totaling $25.4 mln.

MICEX blue chips also saw a fair amount of upside yesterday with the list of gainers ranging from +0.02% (Sberbank) to +2.26% (Surgutneftegaz). In negative territory were Rostelecom (-0.19%) and Mosenergo (-0.65%). The MICEX Index was up 1.17% to 628.26 on trading volumes amounting to $880.80 mln.

Meanwhile, Gazprom ended up 1.93% to Rub 83.58 on SPICEX with 12.4 mln shares changing hands.

FINAM
Russian Brokerage Company
http://www.fin-rus.com

Lebedyansky Cannery plans to launch production of mineral water at Progress, its plant based in the Lipetsk region-based plant, in August-September 2005. The company intends to promote mineral water in the central, southern regions of Russia and probably all across Russia at a later time. The company’s financial director said that Lebedyansky has already spent €3 mln on purchasing equipment for mineral water production facilities.

In our view, rolling out mineral water facilities is a strategically important move, since this sector holds robust potential. The drinking and mineral water market is currently one of the most dynamically developing segments in the food industry. It has grown 20-25% a year in recent years. Nonetheless, the market is far from saturation. At present, Russia’s annual rate of mineral water consumption stands at 15 liters per capita, whereas this figure is equal to about 100 liters in Europe. Growth in mineral water consumption will be driven by rising disposable income of the public and a shift in consumer preferences towards more healthy food.

FINAM
Russian Brokerage Company
http://www.fin-rus.com

The Russian equity market stayed in the growth groove on Thursday, breaking back through the 700 mark. Investors are still focused on Gazprom’s AGM and although we do not expect to see any major developments, market players are hopeful that some details on the upcoming liberalization could be made public.

The highlight of yesterday’s news flow was a statement by German Gref that all the documents required for the state to buy back a 10.74% stake in Gazprom would be signed before the meeting, i.e. by the end of Thursday. Also, Moody’s rating upgrades for a number of companies (Gazprom, Alrosa, Russian Railways Company and Transneft) were read by the market as a positive. And after Russia’s May deal with the Paris Club on advance repayment of $15 bln of its sovereign debt, investors are now looking for an upgrade of Russia’s credit rating within the next few months.

We also note the rise in Sberbank, whose stock price headed north yesterday on speculative anticipation prior to the release of the bank’s FY04 IAS financials, robust performance of Russian Eurobonds and expectations of a softening in equity ownership by foreign investors.

Most RTS blue chips closed up within a band ranging from +0.25% (NorNickel) to +1.69% (Sberbank). On the other end of the spectrum, UES (-0.13%) and Sibneft (-0.16%) ended up in negative territory. The RTS Index advanced by 0.91% to 702.28 on trading volumes amounting to $27.6 mln.

MICEX was a little less bullish, with most blue chips falling within a band ranging from +0.1% (Sibneft) to +2.7% (Sberbank). Bellwether (-0.05%), NorNickel (-0.17%), Tatneft (-0.29%) and Mosenergo (-1.30%) topped the list of decliners. The MICEX Index was up 0.66% to 632.39 on volumes totaling $880.80 mln.

Gazprom saw a nice rally on Thursday, climbing 1.22% higher on SPICEX to close at Rub 84.6 with 20.4 mln shares changing hands.

FINAM
Russian Brokerage Company
http://www.fin-rus.com

The growing economic influence and significance of BRIC countries (Brazil, Russia, India and China) is already being felt on the global arena and in politics.

For example, discussions are currently under way to increase the number of permanent members in the UN Security Council, the most significant body of this organization. The most likely candidates are India, Brazil, Germany and Japan.

Given that Russia, China, the US, Great Britain and France are already permanent UN Security Council members, we would like to see all BRIC countries on board if the above candidates are deemed eligible for membership. It is quite curious that the G7 will have only 5 seats on the Council.

This issue underscores that the rising economic power of Russia and other BRIC countries (a comparison of GDP figures of BRIC and the G7 can be found in my previous article “88,000 “dollar” millionaires in Russia”) is reflected in international politics. In my view, this will result in the establishment of a more peaceful and secure “multipolar world” which should in turn have a positive impact on the global economy.

Mikhail Aristakesyan
Expert, FINAM
Russian Brokerage Company
http://www.fin-rus.com

Friday’s trading session kicked off in negative territory as market players opted for a round of profit-taking after several days of steady upside. The downtrend gained leverage as Western bourses grappled with oil prices testing $60 a barrel. But by noon, blue chips began to creep back up on the back of more positive news about the upcoming liberalization of Gazprom.

There was certainly no earth-shaking news at the gas monopoly’s long-awaited Friday AGM, as chairman of the BoD of the holding Dmitry Medvedev announced that the state has managed to gain a controlling stake in the gas giant. He pointed out that all transactions related to the purchase of equity from the balance sheets of Gazprom subsidiaries by Rosneftegaz have been wrapped up and “have been given the force of law”. Medvedev also said that liberalization is being targeted for year-end 2005, by which time the ring fence should come down.

Most RTS blue chips were either flat as a pancake or moderately in the red at Friday’s close. The band of timid gainers ranged from +0.07% (Surgutneftegaz) to +0.64% (Sibneft). In negative territory, the list of decliners featured bellwether UES (-0.33%) and NorNickel (-0.16%). The RTS Index posted a downtick (-0.04%), landing at 701.98 on average volumes totaling $25.34 mln.

MICEX blue chips closed out the week in a slightly more upbeat mood. The losers finished within a band ranging from -0.02% (Tatneft) to -0.66% (Mosenergo). The gainers spotlighted Lukoil (+0.1%), Sberbank (+0.4%) and Sibneft (+2.1%). The MICEX Index advanced by 0.08% to 632.9 on thin volumes amounting to just $651.00 mln.

Meanwhile, Gazprom extended its northward ascent on SPICEX, adding on 0.24% to Rub 84.8 on heavy volumes, with 35 mln shares changing hands.

FINAM
Russian Brokerage Company
http://www.fin-rus.com

The gas monopoly’s June 24 AGM addressed a wide range of interesting issues which concerned not only regular agenda items, but also the procedure for payment of the 10.74% interest acquired by the state, the removal of the ring fence around the gas holding’s shares and the potential acquisition of strategic assets.

Alexei Miller and Alexander Medvedev reported that the transactions over Rosneftegaz’s acquisition of Gazprom shares from its subsidiaries have essentially been wrapped up. Slightly less than 10.74% of Gazprom’s shares is currently listed on state-owned Rosneftegaz’s balance sheet. The 10.74% block of shares acquired by Rosneftegaz is to be paid out in three tranches, with the first to be wired within a month and the last transfer to be made by year-end 2005. Rosneftegaz will tap international debt markets to raise the amount needed to pay for this equity stake. The gas monopoly will pay less than $1 bln in taxes to the state on time. Miller also said that the ring fence around the gas producer’s shares will be lifted along with the cancellation of all restrictions imposed on foreign participation in Gazprom’s capital by the end of 2005. As regards possible acquisitions using the funds raised, the gas holding’s executives reiterated that in the days to come Gazprom will raise the issue of acquiring Rosneft’s assets, first and foremost, its Sakhalin projects.

We are of the opinion that this geyser of news will push up the gas holding’s market capitalization, although we expect it to rise at a moderate pace until the first steps towards gas market liberalization are taken.

FINAM
Russian Brokerage Company
http://www.fin-rus.com