Russian Daily Monitor

Highlights

Svyazinvest privatization Threatened

Vedomosti reported Monday that the Government has returned the draft
decree on Svyazinvest
,s privatization to the Russian ministry of economic
development and trade, which is responsible for preparing the decree. The
ministry brought the draft before the Government in March 2005, and the
market saw it as a sign that privatization was near. The return of the
draft could mean a delay in the sale of the telecommunications holding.
The reason for the return is that the ministry did not agree with the
Anti-monopoly service, the Ministry of finance, the Interior ministry and
the Federal Guard Service. Previously, the procedure of privatization did
not require agreement with any of these services, but the Government
decided that should be changed.
The main threat from this development is that the security services may
lobby for Rostelecom
,s removal from Svyazinvest before privatization. The
Siloviki insist that an operator should be created that would service
state telecommunication needs. The most obvious way to create an operator
is to keep Rostelecom state-owned and to privatize Svyazinvest without
Rostelecom. However, the Ministry of economic development and trade has so
far managed to support its scheme for the privatization in its current
shape in debates with Federal Security Service, and we think that it will
succeed now. We expect the telecommunication holding will be privatized
with Rostelecom and we do not see the return as greatly threatening the
privatization schedule. The Economic ministry said it will again bring a
draft towards the end of this week, and almost all services reported they
are ready to meet this deadline. We expect that the Svyazinvest
privatization will not be delayed and will happen in late-2005 or the
beginning of 2006.

Gas price compromise

Wholesale domestic gas prices are likely to be hiked 14-16% in 2006, Denis
Volkov of the Federal Tariff Service said on Friday. The decision, which
could be announced next month, seems to be a compromise between the 11%
increase proposed by Economic Ministry and the 21% hike Gazprom was
lobbying for.

Money market

The dollar is rising above RUB 28 on the Russian FX market today as the
Russian currency continue to shadow the dollar-euro rate. Weak GDP data in
1Q2005 from France (0.2% y-o-y against a projected 0.4% y-o-y) and rising
concerns that the EU constitution may be rejected by French voters are
providing additional support for the dollar. We expect further rouble
slippage against the greenback, although at a rather moderate pace, as
forthcoming excise and extraction taxes payments on May 25 may buoy the
local currency.
On Friday the rouble slid by 1 kopeck against the dollar to hit RUB 27.97,
while the greenback reached a seven-month high of 1.256 to the euro.

Bond market

The Rouble bond market is feeling a little less comfortable, with a
renewed surge in the dollar coming at a time of tightening liquidity (the
overnight interbank rate is approaching 3%, its highest level this year
except a one-off 6.4% early May). At the same time we see the contraction
in liquidity as temporary and market sentiment may well improve during the
week.
In the meantime, a number of corporate and sub-sovereign bond placements
are to be conducted this week with a total issue of RUB 8,62 bln. On
Monday bonds of the Yaroslavl region and NSMMZ of RUB 1 bln each are to be
placed. The most significant placements are to be held on Thursday with a
RUB 3 bln issue from East Line Handling and issues by the Volgograd region
and Marta-Finance with a nominal value of RUB 0.7 bln each.
On the back of improving economic activity in the United States, the
Russian Eurobond market continues to maintain record high positions in its
sovereign sector. On Friday, the Russian Eurobond market was calm. The
sovereign spread contracted by 1 bps to 180 bps and the Russia
,30 yield
did not change at all. The UST
,10 yield climbed 2 bps to reach 4.13%.
According to Reuters, Gazprom on Friday conducted the placement of a EUR 1
bln issue of its 10-year Eurobonds with a 5.875% yield. The issue was
approved by Gazprom
,s board of directors in February and is in line with
the mid-term debt strategy of the gas monopoly.

Equity market

On Monday the equity market looks likely to repeat Friday
,s uninspiring
dynamics. In the absence of any meaningful newsflow, rich domestic
liquidity is likely to search for value elsewhere. Last week
,s positive
news on Gazprom has lost its momentum while news on delays to the
Svyazinvest privatization is unlikely to play out on the downside, given
the general market fatigue from this topic
* we believe there is still a
chance that the government will sign this decree, which the market sees as
crucial, before heading off for summer vacations.
On Friday, the Russian stock market was flat at 647 points on slacker
turnover. W-o-w the market posted an anemic gain of 0.6%. Gazprom
continued its upward movement
) locals added 1.3% and ADSs jumped 1.1%.
There was stronger movement in Russian mobiles: Vimpelcom edging up 8.2%
w-o-w and MTS growing 2.3% w-o-w.
Turning to oil news, the head of OPEC claimed on Sunday that he sees
$30-50/bbl price corridor as the most acceptable for both producers and
consumers. He also said that the cartel may increase its production in
Iraq in the near future, which may push crude prices further down. On
Friday Brent closed flat at $46.7/bbl.