Russian Daily Monitor

Share return opens way to Sibneft sale

Following several court decisions, the General Prosecutors
, Office has
released the 14.5% of Sibneft shares arrested on YUKOS accounts, returning
them to Millhouse Capital, which represents the interests of Sibneft
,s
core shareholders. The development leaves open the way for 72% of the oil
company to be taken over by Gazprom, with the deal talks entering the
final and, hopefully, more public, stage.
We reiterate our view that Sibneft minority shareholders are unlikely to
benefit from the acquisition, as neither the rumoured below-market pricing
nor the replacement of the current management
) the key ingredient of
Sibneft
,s investment story
) are to be welcomed. The market, meanwhile,
keeps trying to guess the cut-off date for the huge USD 2.3 bn dividend,
to be announced shortly.

Svyazinvest likely to be sold in 2006

Russia
,s Economic Development and Trade minister German Gref said
Wednesday that an auction of the government
,s stake in Svyazinvest was
unlikely to be held in 2005, and it would thus be held in early 2006. To
be privatized, Svyazinvest should first be removed from the list of the
country
,s strategic enterprises. A draft decree on its removal would need
to be prepared by the Economic Ministry, but the latter has still not
agreed a draft with the Interior Ministry. As the privatization process
needs time, it is very unlikely to happen in 2005 as the decree has
neither been agreed nor signed by the president.
The formal reason for the disagreement with the Interior Ministry is over
the question of whether a private company would be able to protect
information from state agencies. However, we believe information
protection can be delivered by a golden share mechanism or by legislative
requirements. We think a delay in privatization acts in favour of Alfa
Group which opposed a prompt privatization, because it was not prepared
for it.
Gref
,s statements correspond to our expectations. We think the
privatization will happen in early 2006, after being announced in autumn
2005. We expect that the state holding will be privatized in its current
shape, i.e. with Rostelecom. The would-be buyers of the holding are
Telecominvest, AFK Sistema and Alfa Group. President Putin
,s support of
Alfa
,s expansion in Turkey suggests that the latter
,s chances of buying
the telecoms giant are rising.

TNK-BP sued

A flurry of mutual corporate lawsuits have hit Russian oil & gas companies
recently, with TNK-BP now targeted by ADR holders from its former
subsidiary, Chernogorneft. They claim their company fell prey to a
calculated bankruptcy in 1999, when TNK took over Chernogorneft
,s assets
(producing 120 kbpd of oil) at well below market price.
This comes on the back of Sibneft suffering from the Sibneft-Yugra case,
and gas producer Novatek settling its conflict over its sale of Geoilbent

) a timely move, incidentally, which contributed to the success of
Novatek
,s IPO (see below).
We believe the process of cleaning up such traces of the wild
+90s from
the corporate landscape are inevitable, however painful. As for the
companies involved, such risks were generally incorporated in their
discount rates, and by paying a reasonable amount of cash to shed its
corporate raider past, a company could, in the long run, be more than
compensated by lower cost of capital.

Capital investment up

According to preliminary estimates from the Ministry of Economic
Development and Trade, capital investment rose by 11.1% y-o-y in June, a
level approaching the last year
,s pace (11.8% y-o-y in June 2004).
Growing investments confirm a general picture of a rebound in industrial
production in June and substantial FDI flow for the first half of the
year. At the same time, persistently growing borrowing in the private
sector (both abroad and on local markets) looks set to have an effect,
with some of the attracted funds likely to be channeled into the real
sector eventually.

Money market

On Wednesday, despite support for the dollar from U.S. Federal Reserve
Chairman Alan Greenspan in his report on the U.S. economy and Fed policy,
the euro-dollar rate backtracked to USD 1.215 from almost 1.20. That move
likely reflects continued consolidation after the persistent fall from mid
March levels around USD 1.33-1.34 to the euro. We believe the dollar has
the potential for a further climb against the euro, with support likely to
come from strong economic data. In turn, the reigning currency basket
mechanisms on the local market should push the rouble down against the
dollar and up against the euro. A rouble-dollar rate of 29 still looks
likely in the mid-term.

Bond market


Despite enlivened trade activity, the rouble bond market continues to
drift sideways. Rising money market rates ahead of approaching tax
payments dampened market sentiment on Wednesday. However, it did not
prevent government bonds from backtracking to early-week positions. The
placement of RUR 16 bn of OFZ-25057 on Wednesday met with significant
demand, resulting in a yield of 7.49% for the bonds, which mature in five
and a half years. It seems that the primary market will retain its
attractiveness as long as chances remain that it will give even a modest
premium. However, the surging stock market and rising concerns of speeding
inflation may force market players to look for higher yields, at least to
save the real value of their funds.
The Russian Eurobond market keeps on tracking benchmarks with gradually
expanding spreads. We believe U.S. Treasuries will remain the main the
driving force on the market as the currently retained spread between
150-160 bps likely reflects the fair risk premium for Russian sovereign
sector bonds. Aside from external debt improvements and Russia
,s swelling
double surpluses (trade and budget) the recent signs of recovering
industrial production and investment (including FDI) may support the
Russian credit spread. The macroeconomic improvements should increase the
chances of a further credit rating upgrade. However, the main question is
whether the posted signs of economic rebound indicate sustainable changes
in economic expansion.
Expected comments that the U.S. economy is growing at a solid pace,
inflation remains contained and the Federal Reserve will continue raising
the rates at measured pace were shared by Fed
,s chairman Alan Greenspan on
Wednesday in his semi-annual testimony before the U.S. Congress.
Uncertainties as regards rising labor costs and oil prices contributing to
inflationary pressure were also mentioned. The conundrum of low long-term
interest rates received some elucidation from the Fed, in terms of
fundamental changes in global production and savings observed of late. In
general, the Fed
,s report gave grounds to anticipate further monetary
tightening -- although the sensitivity of benchmark yields to such a move
could differ from the past.
On Wednesday, the yield of the Russia
,20 added 1 bps to reach 5.73%, while
the yield of the 10-year UST lost 1 bps, clocking in at 4.18%. As a result
the EMBI+Russia index expanded by 3 bps to 153.

Equity market

With investors queuing up to buy newly listed Novatek, Russia
,s largest
independent gas producer, (an investment marked by many as high risk), the
broader market continues to generate inflows. Novatek plans to offer as
much as 19% of its shares in a public placement to raise up to $966 mln,
with an initial 17% this week and a greenshoe option a month later.
According to media reports, the issue is oversubscribed by a factor of
six. Novatek has set a price range of $14.75 to $16.75 for the GDR
placement.
Fundamentally, we see considerable upside in selected Russian oils, whose
valuations should benefit from a reassessment of oil price inputs. LUKoil
is our favourite pick in the sector, both on fundamentals and expectations
of continued buying of strategic investors such as ConocoPhillips. On
Thursday, we expect speculative interest in Sibneft, following the
Basmanny Court
,s decision to lift the freeze on the 14.5% stake in the
company belonging to YUKOS.
Consumer stocks should be in great demand as well, as investors try to
profit on booming domestic consumption
*in this sector we like
Lebedyanski, Russia
,s top juice producer.