Interfax news agency reported that China is set to invest $12 bln in Russia until 2020. These funds will go towards implementation of joint energy and infrastructural projects with long payback periods, Chinese ambassador to Russia Liu Guchang said in an interview with Russia – China. 21st Century magazine.

In our view, interest in investing in the Russian utility industry on the part of foreign strategists will only rise further down the road and in the years to come large European energy giants could also make an attempt to grab a share of the Russian power market. Needless to say, this will be a positive for the investment appeal of Russian utility stocks and portfolio investors.

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

The Russian equity market got off to a brisk start again yesterday on the strength of Wednesday’s stellar rise to new highs on the global oil market. The uptrend was also fueled by insistent rumors of a sovereign credit upgrade for Russia in the not-too-distant future. But before long, a round of profit-taking broke out across the board, which rolled back the benchmark.

The sell-off shifted into high gear after the media started wiring reports shortly after noontime that downtown London had been hit by a wave of presumed terrorist attacks. Four attacks over a period of 59 minutes ripped through the Tube and a double-decker bus during morning rush hour. The Group of al-Qaeda of Jihad Organization in Europe claimed responsibility in a website posting, although the authenticity of the claim has yet to be verified. Western markets reacted with a classic knee-jerk dive, and the domestic market followed suit shortly after. Crude oil and the British pound sterling also dipped sharply. But by 2 pm Moscow time most blue chips had shaken off this tragic event and clawed their back into positive territory by the close of the session.

Benchmark RTS was a mixed bag on Thursday, with the following list of decliners: Sberbank (-0.91%), Lukoil (-1.02%), Surgutneftegaz (-1.14%) and Rostelecom (-1.61%). On the other side of the spectrum, the advancers included Mosenergo (+0.63%), NorNickel (+0.97%), UES (+1.33%), and Tatneft (+3.63%). The RTS index eased by 0.39% to 737.35 on more very heavy volumes amounting to $55.3 mln.

MICEX was hovering around the flat line yesterday, with the band of losers ranging from -0.05% (NorNickel) to -1.3% (Surgutneftegaz). The gainers included Mosenergo (+2.85%), Tatneft (+1.5%) and Sberbank (+0.97%). The MICEX index was off 0.02% and settled at 671.73 on heavy volumes totaling $1,329.80 mln.

Meanwhile, Gazprom dropped along with the rest of the market, giving up 0.74% to finish at Rub 85.07 with 39 mln shares changing hands.

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

Yesterday, Rosneft’s President Sergey Bogdanchikov announced that the company is planning to consolidate the shares in its subsidiaries by year-end 2005 as a step towards an initial public offering. The stake could be swapped for shares of minority shareholders in subsidiaries and include as much as 7-8% out of the 49% in Rosneft sold by the state. The rest will be sold in the IPO. Head of EDTM German Gref previously said that Rosneft’s IPO is slated for Q3-Q4 2006. In addition, Sergey Bogdanchikov pointed out that a minority stake of 10-12% could be sold before the IPO in order to slash the company’s debts and improve its debt-to-profit ratio.

Quite naturally, this statement drove up the stock quotes of Purneftegaz and Sakhalinmorneftegaz on Wednesday. On the one hand, the prospects to becoming co-owners of a large state-run company that is mulling an IPO are appealing, since after the placement, liquidity of Rosneft stocks will be higher than that of its subsidiaries. On the other hand, though, we are slightly skeptical about this development. The share swap terms proposed to Rosneft’s minority shareholders will most likely fall short of their expectations. In addition, minority shareholders are exposed to the risk of buying into the equity of a company with high leverage, despite Rosneft’s talk about the possible placement of a 10-12% stake prior to the IPO to pay down the company’s debts.

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

Friday's trading session saw a resumption of the uptrend. Despite Thursday’s lethal London bombings, US markets ended in the black, sending an upbeat signal to the domestic equity market. As for the growth drivers, crude oil bounced back on fears that hurricane Dennis could be upgraded to as high as a Category 5 hurricane, which has been wreaking havoc in the Caribbean and is expected to make landfall on the Florida panhandle by Sunday. Whether or not key oil infrastructure will suffer damage is the million-dollar question, which could catapult prices to new record highs.

The other big boost to the domestic market came in a statement from vice-president of Moody’s Investor Service Jonathan Schiffer, who once again claimed that the rating agency could raise Russia’s country credit status in view of its robust creditworthiness and growing debt repayment aspirations. What’s more, the recent pull-back caused by the London bombings provided yet another incentive for investors to buy. On the corporate front, upbeat expectations hinged on the upcoming release of Gazprom’s FY2004 IAS financials, which should come in strong on the back of rising domestic and export gas prices, a catalyst for the gas monopoly’s stock prices in recent weeks.

By Friday’s close, most RTS blue chips reaped tangible gains within a spread ranging from +1.56% (Sberbank) to +4.22% (Rostelecom). The decliners included Sibneft (-0.86%). The RTS Index advanced by 1.59% to 749.06 on heavy volumes amounting to $32.3 mln.

MICEX blue chips also closed out the week largely in positive territory, with the range of gainers running from +1.1% (Surgutneftegaz) to +2.6% (Sberbank). Marginally in the red were Tatneft (-0.2%) and Sibneft (-0.7%). The MICEX Index climbed by 1.5% to 681.84 on heavier-than-average volumes totaling $973.58 mln.

And on the SPICEX front, Gapzrom saw a nice rally, moving up 2.13% to Rub 86.88, with 32 mln shares changing hands.

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

Interfax reported citing the utility’s press service that Irkutskenergo’s electricity output stood at 28.37 kWh in H105, up 9% y-o-y. In addition, the power plant posted a decline in thermal power output to 14.59 mln GKal, down 4% on the year-earlier period.

For the record, earnings from electricity sales account for nearly twice as much as those from thermal power in the company’s revenue mix. Given the above developments, this should put the regional power producer’s topline growth above the average for its industry peers.

We assign a Buy recommendation to Irkutskenergo shares and reiterate our fair price of $0.27 per common share.

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

There was more green on the screen in Monday’s trading session. The main external driver was solid performance by American and European bourses, which have completely shaken off the effects of last Thursday’s tragic events. Meanwhile, some of the top gainers from last week saw a round of profit taking. On the downside, the corrective trend gathered steam on a newswire that former PM Mikhail Kasyanov is being probed by the Prosecutor General’s Office for alleged fraud and abuse of power. The charge does nothing to improve the country’s tarnished political image and could do more damage to the domestic stock market if the scandal deepens.

Another major piece of news moving Monday’s trading session was President Vladimir Putin’s Friday statement that he is aware of the talks in progress between Gazprom and Sibneft. The Russian president distanced himself from Gazprom’s bid to buy into Roman Abramovich’s oil company, and merely limited himself to saying that the deal should be transacted in compliance with market principles. He also said that Gazprom’s aspiration to pick up this oil asset does not necessarily mean the state is behind it. Be that as it may, the bottom line was hammered home: that Gazprom is the main contender for the takeover of Sibneft.

Monday was a mixed bag on benchmark RTS, with the following blue chips closing in the red: UES (-0.16%), NorNickel (-0.16%), Surgutneftegaz (-0.57%) and Rostelecom (-0.24%). On the other side of the spectrum, the advancers included Lukoil (+0.13%), Sibneft (+0.4%) and Sberbank (+2.09%). The RTS index climbed by 0.25% to 750.96 with average volumes amounting to $22.4 mln.

MICEX was in nearly the same mood as the benchmark yesterday, with the gainers varying from +0.2% (Rostelecom) to +0.6% (Mosenergo). The list of losers included Surgutneftegaz (-0.1%), Sibneft (-0.5%) and Tatneft (-1.1%). The MICEX index added on 0.23% to settle at 683.42 on light volumes totaling $640.66 mln.

Gazprom was the prime market mover on Monday on expectations of an upcoming takeover of Sibneft. The gas monopoly jumped 1.6% to Rub 88.3 on heavy volumes and 10.8 mln shares changing hands.

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

Judging by news coverage in leading Western media about Russia, which is largely negative, investors could easily get the impression that investments and Russia are two notions that do not go hand in hand.

However, if we look at the facts and the ongoing processes which media editors view as uninteresting to the general audience, a different picture emerges.

For instance, a recent poll held by PBN among 158 companies operating in Russia has revealed the following results: 78% of companies plan to scale up their operations in Russia over the next 3 years, while 20% plan to leave this scope unchanged and a mere 2% plan to cut it.

Russia offers one of the most favorable tax regimes in the world. For instance, income tax rate for individuals is 13%, while it is 24% for legal entities. Admittedly, the advantages of low tax rates are offset by overly zealous tax inspectors, who have been doing their best to distort the liberal tax legislation.

In our opinion, the main hurdle to faster expansion of the Russian economy is red tape, which seriously hampers business dealings in Russia. Nonetheless, the rewards still far outweigh the costs involved in conducting business in Russia.

Max Gutbrod, Partner in legal company Baker&McKenzie in Moscow and Deputy Chairman of the Association of German Business in Russia says the number of German companies in the Association has risen dramatically: from 150 to 500 over the last 18 months.

Andrew Somers, President of the American Chamber of Commerce in Russia, said in a recent Reuters interview: “The facts encourage me to say that the investment climate is excellent”. He mentioned the acquisition of juice producer Multon by Coca-Cola for $600 mln and the acquisition of 2 aluminum smelters by Alcoa for $260 mln, as an illustration of the overall situation.

The list of successful projects by international companies in Russia could easily be extended, including successful operations of Swedish furniture giant IKEA.

Ford should also be added to the list. This corporation plans to boost its output in Russia to 35,000 cars in 2005 from 25,000 in 2004. We view Ford’s plans as reasonable. There is currently a 6-month line of clients wishing to purchase the new model of the Ford Focus II (the basic model sells for about $12,000).

According to expert estimates of Finam analyst Natalia Kocheshkova, the capacity of foreign- made car market will be 160,000 in 2005. Underscoring the positive outlook of the Russian market, Toyota recently announced the construction of its assembly line in St. Petersburg worth $144 mln.

Given that there are about 145 mln consumers in Russia, retail majors have begun to eye the Russian market. British Marks & Spencer plans to launch its first store in Moscow in autumn 2005, while US Wal-Mart has also been mulling a start-up.

In 2004, the amount of foreign direct investments (FDI) in Russia was $11.7 bln, nearly twice as much as the figure for India ($5.3 bln), but is still a far cry from investments in China ($54.9 bln).

By and large, in our opinion, investors who are looking for Russian exposure would be well advised to steer clear of politics and be extremely careful when acquiring major stakes in commodity companies, since the Kremlin views this area as strategic.


Mikhail Aristakesyan
Expert, "Finam"
http://www.fin-rus.com
http://finam.blogspot.com

The Russian equity market opened Tuesday in correction mode, but started to stabilize around noon. The downtrend was triggered by Tuesday’s news that Moody’s decided to downgrade three natural monopolies: Gazprom, RRC and Transneft, which had recently been upgraded. Their ratings were lowered to Baa3 with a positive outlook, which matches Russia’s foreign currency obligations.

It therefore looks as though market players’ expectations of a swift sovereign rating upgrade (right after the notch-up in state companies) will miss the mark. We believe that there was little point in looking for an upgrade. It would have made more sense to focus on the gist of the statement by Jonathan Schiffer, vice president of Moody’s Investors Service. As a matter of fact, Moody’s is far more interested in the Russian government’s ability to stem the slowdown in investments and tame inflation, whereas it will take at least until autumn to get a handle on the stabilization fund policy.

By the end of yesterday’s trading session, RTS blue chips showed mixed performance, with the band of decliners including Sberbank (-0.55%) and Sibneft (-1.84%). On the other side of the spectrum, Lukoil (+0.38%) and NorNickel (+0.41%) finished in the black. The RTS index edged up 0.11% to 751.78. Total turnover market came to $166.8 mln including the classical market ($29 mln), the stock section ($61 mln) and FORTS ($76 mln).

MICEX blue chips were less upbeat, falling within a range from -0.4% (Rostelecom) to -1.75% (Sibneft), which released its FY2006 GAAP financial statement below market expectations. Bucking the downtrend was NorNickel (+0.19%). The MICEX index edged down 0.67% on average volumes amounting to $708.65 mln.

On the SPICEX front, Gazprom pulled back 0.23% to Rub 88.1 with 10.5 mln shares changing hands.

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

In January-May 2005 sales by Russian auto makers declined by 9.2%: 403,484 in 5M05 down from 444,140 in the year-earlier period.

At the same time, sales of domestically-assembled vehicles are on the rise. In particular, AvtoTor marketed 8,400 autos in the January-May period (an upsurge of 73.6% against the same period a year ago, 7,440), while Ford Motor Company sold 10,345 automobiles, up 9.5%, with production amounting to 10,375 vehicles.

In January-May 2005 auto imports totaled 268,500, a 60% increase compared to the same period a year ago. In monetary terms car imports equaled $2.6 bln, or up 55% y-o-y.

Thus, based on 5M05 results, a widely anticipated picture has emerged, with the number of foreign autos (imported and assembled in Russia) climbing, while Russian auto makers are faced with a contraction in sales. We expect this trend to continue further down the road.

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

Bucking expectations of an extended correction, the Russian equity market showed robust gains across the board on Wednesday. The rally found support both in a renewed rise in crude oil prices on fears that another tropical storm could disrupt output in the Gulf of Mexico and outperformance by US stock indexes.

On the domestic economic front, a bullish signal came from a statement by the RF French Embassy that Russia is prepared to pay off 40% of its foreign debt (about €900 mln), with the first tranche due to the Paris Club on July 15. This move shows that the government’s foreign policy is on track, which is a benchmark for international ratings agencies and was well received by the marketplace.

The key corporate event of the day was S&P’s upgrade of Gazprom from stable to positive, and confirmation of the gas monopoly’s BB- rating. The positive factors behind this decision include a favorable gas export pricing environment in 2005 and looking ahead, as well as rising domestic gas prices. In our view, the upgrade factors in the state’s acquisition of the controlling stake in the gas mammoth, which should give an edge to Gazprom in future operations. The gas monopoly’s stock prices rose marginally on this news.

By the end of Wednesday’s trading session, most RTS blue chips ended up within a band ranging from +0.95% (Rostelecom) to +2.41% (UES). The RTS index added on 1.05% and settled at 759.64. Total turnover stood at $174.2 mln, including $28.6 mln on the classical market, $68.7 mln on the stock exchange and $76 on FORTS.

MICEX was like-minded yesterday, with the band of advancers varying from +0.55% (Sibneft) to +2.1% (UES). The MICEX index finished at 686.44 (+1.12%) on average volumes totaling $701.12 mln.

Meanwhile, Gazprom saw modest gains on SPICEX with the last deal closed at Rub 88.6 (+0.6%) and 12.5 mln shares changing hands.

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

On Wednesday VimpelCom announced the acquisition of an 84.4% stake in Sakhalin Telecom Mobile (STM) for $51.2 mln and a 50% stake in Sakhalin Telecom Limited (STL). The buyer also assumed debt repayment obligations amounting to $2.2 mln.

Sakhalin Telecom Mobile is a GSM 1800 and DAMPS operator which provides cellular coverage on the island of Sakhalin.

Sakhalin Telecom Limited is a fixed-line altoperator which is also Sakhalin-based.

Given that Sakhalin is a promising region in terms of growth potential, we are upbeat on this acquisition, which could allow VimpelCom to maintain its rapid development in the future. However, STM will not have any substantial impact on the company’s operating indicators due to its small size. We therefore leave our Buy recommendation for VimpelCom unchanged with a target price of $47.37 ($189.48 for common shares).

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

Thursday’s trading session kicked off with a moderate correction as market players believed that most blue chips are oversold. A dip in global crude prices also lent support to the downswing in Russian oils. News on the domestic front was also far from encouraging. The RF Constitutional Court ruled that the 3-year statute of limitations shall not apply to “dishonest taxpayers which obstruct tax audits”. Needless to say, this wording gives rise to ominous misgivings, since it leaves the door open for tax authorities to construe their own definition of a “dishonest taxpayer”, as well as the related term for the statute of limitations.

Meanwhile, media reports about Gazprom not receiving $7.1 bln on time for its sale of the state’s 10.7% stake recently assigned to Rosneftgaz or even termination of the deal if Rosneftgaz fails to fulfill its obligations, as stated in Gazprom’s investment memorandum devoted to its most recent Eurobond issue, can hardly be called news. The point is that these risks were built into the deal right from the outset.

At Thursday’s close, RTS blue chips closed in negative territory ranging from -0.3% (UES) to -1.45% (Sibneft). The RTS index eased 0.37% to 755.29. Total turnover stood at $164.6 mln, including $21.6 mln on the classical market, $106 mln on the stock exchange and $36.2 mln on FORTS.

MICEX blue chips were also largely on a southbound track yesterday. The band of decliners ranged from -0.14% (UES) to -2.2% (Sibneft). On the other side of the spectrum, Rostelecom (+0.13%) and Mosenergo (+1.75%) bucked the trend. The MICEX index dropped 0.52% to 682.89 on light volumes totaling $574.45 mln.

Gazprom was 1.17% lower on SPICEX, closing at Rub 87.59 with 12.5 mln shares changing hands.

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

On Thursday, the Constitutional Court upheld the 3-year statute of limitations for tax offenses. However, it stated that the statute does not apply to “dishonest taxpayers” which “obstruct tax audits”. The document specifies that when considering tax violation cases a court is entitled to take into account other circumstances. In particular, it can check – upon request by a tax inspectorate - whether a taxpayer has acted illicitly for the purpose of dragging out tax audits.

On the one hand, at least some criteria for “dishonest taxpayer” are being enacted as a countermeasure against tax probes. For the record, the “dishonesty” criterion was cited as the basis for exceeding the statute of limitations in the back tax claims imposed against Yukos. However, the interpretation by the Constitutional Court still raises legitimate concerns about subjective interpretation of a taxpayer’s “honesty” and, consequently, the statute of limitations applied to it. Thus, the state’s measures aimed at improving the domestic business climate and restoring confidence on the part of businesses are looking rather dubious.

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

The Russian stock market kicked off the new week with blue chips fluctuating in different directions. The bullish mood in early trading which drove up most blue chips dissipated into a wave of sell-offs around noon.

Trading volumes continue to remain strong both on MICEX and RTS as Western investors are taking a keen interest in Russian securities. This is due in part to global trends, especially the outflow of Western capital from Asian-Pacific financial markets. However, buying from non-residents at such attractive prices is coming up against sell-offs from Russian market participants bent on profit-taking.

We would like to note a decline in the oil sector, which we attribute to a downturn on the global crude market where prices slipped to pre-Hurricane Katrina levels, i.e. by more than $2 a barrel. And while oils still remain strong, we wouldn’t be overly surprised to see the oil sector take a breather, making way for other stocks to take center stage.

On Monday, Gazprom was the main market mover, up a whopping 5%. Most likely, investors were bullish on the gas giant in the aftermath of Alexander Medvedev’s interview with Vedomosti on Monday where he pointed out that Gazprom would like to launch an IPO on NYSE within two or three years after the ring fence comes down.

On RTS, blue chips were a mixed bag. Sibneft and Mosenergo landed in the black, up 0.9% and 4.2%, respectively. On the other side of the spectrum, Sberbank dipped 0.1%, UES declined 0.3%, Surgutneftegaz decreased 0.5% and Lukoil slid 0.9%. Benchmark RTS inched up 0.03% to 910.14. Trading volumes totaled $577.8 mln, including $64.8 mln on the classical market, $271.7 mln on the stock exchange section and $238.6 mln on FORTS.

On MICEX, most blue chips posted losses within a band ranging from -0.4% (Mosenergo) to -1.5% (Lukoil). However, Tatneft, NorNickel and Rostelecom added on 0.01%, 0.5% and 1.05%, respectively. The MICEX Index was 797.46, down 0.77% on trading volumes of $1,107.00 mln.

And on the SPICEX front, the last deal in Gazprom’s shares was closed at Rub 119.2 per share, up 4.47% on Friday’s close, on trading volumes of 44.6 mln shares.

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

The Russian equity market experienced quite a deep correction on Tuesday. The downtrend hit nearly all blue chip names across the board with strong volumes on major trading floors. It’s noteworthy that the trading activity of investors who disposed of their Russian stocks intensified last week. Owing to global instability some investors opted to cut the most profitable positions in Russian issues. However, until Tuesday the market had witnessed strong support from Western investors who bought more Russian stocks for their portfolios, especially Gazprom. During the second session of the week upbeat newswires surrounding the gas giant were priced in and buying volumes thinned out drastically. On the whole, losses among Russian stocks averaged 2%. Needless to say, the market could not keep on going strong indefinitely without any profit-taking and, consequently, the correction finally broke. A temporary cool-down in market players’ interest in Russian plays had been anticipated for a long time and there are quite a few experts right now who can predict the strength of the current market trend with compelling accuracy.

Yesterday the market witnessed strong support from Western investors who bought more Russian stocks for their portfolios, especially Gazprom. During the second session of the week upbeat newswires surrounding the gas giant were priced in and buying volumes thinned out drastically. On the whole, losses among Russian stocks averaged 2%. Needless to say, the market could not keep on going strong indefinitely without any profit-taking and, consequently, the correction finally broke. A temporary cool-down in market players’ interest in Russian plays had been anticipated for a long time and there are quite a few experts right now who can predict the strength of the current market trend with compelling accuracy.

As a matter of fact, the market picture has been quite ambiguous for the past week or so. On the one hand, the rally has enough legs to press ahead for the time being thanks to a favorable external economic environment and strong demand for Russian shares on the part of Western investors. On the other hand, most market participants have their plates full with stock market assets. The jittery mood is all too plain to see. Any attempt to launch sell-offs on the back of a decline in global crude prices, for example, could result in local panic. If the market drifts north on the back of Western buying, one can see the situation which arose on Tuesday. The depth of the correction is hard to pinpoint for the time being, but by the end of this week it should be clear where the market is heading.

By the final bell, RTS blue chips ended up largely in the red within a range extending from -2.6% (Lukoil) to -6.3% (Tatneft). Sibneft and Mosenergo were the only blue chips to buck the downturn, up 0.9% and 4.2%, respectively. Benchmark RTS slid 2.35% to 888.73 on average volumes equaling $282.7 mln, including $28.4 mln on the classical market, $128.2 mln in the exchange section and $125.2 mln on FORTS.

On MICEX, most liquid stocks closed down within a band varying from -1.3% (Sibneft) to -5% (Tatneft). The MICEX Index settled at 772.14, down 3.18%, on strong volumes amounting to $1,253.37 mln.

And on the SPICEX front, the last deal in Gazprom shares was closed at Rub 115.8 per share, i.e. down 2.9% on the session, with volumes totaling 39 mln shares.

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