Russian Daily Monitor

Fitch upgrades Russia to BBB

On Wednesday, Fitch lifted its sovereign credit rating for Russia from
BBB- to BBB. Although the move was anticipated, owing to notable
improvements in external debt management and the growing budget surplus
and FX Reserves, Moody
,s was expected to be the first to award the
upgrade. We would not be surprised if Moody
,s follows shortly, lifting its
credit rating to Baa2.

Svyazinvest privatization scenario clarified

The government has decided on a course of action to protect the interests
of the Russian armed services after the privatization of state-owned
telecommunication holding Svyazinvest. The siloviki initially worried that
new owner of the holding might refuse to provide them with
telecommunication services, and thus proposed either maintaining state
control over Svyazinvest or removing Rostelecom from the holding and
obliging the operator to service state agencies. On the other hand, the IT
and Telecommunication Ministry and Economic Development and Trade Ministry
wanted to sell the state
,s entire stake in the holding and privatize the
giant in its current shape.
In order to promote their aims, they have initiated changes in
Telecommunication Law to force any operator with a significant capacity to
provide state agencies with telecommunication services. Thus, the problem
of guarantees of interests of power services will be solved at the level
of legislation without keeping the state control over fixed-line
telecommunication industry.
This means that Svyazinvest will be privatized in its current shape, i.e.
with Rostelecom, and the news is very positive for the long-distance
operator, whose development might have been threatened had it remained
state-owned. However, it will take some time for the initiated changes to
be approved by parliament, and it means that Svyazinvest
,s privatization
will not happen before 2006.

Far-East Telecom reports 2004 financials under IFRS

Far-East Telecom reported its consolidated 2004 financials under IFRS on
Thursday. The company
,s sales climbed 39% y-o-y to USD 310.1 mn, mostly
because of tariff increases and changes in settlement procedures with
Rostelecom. The growth in traditional revenue items was mostly in line
with our expectations, while revenues from the mobile business were much
higher. Far-East Telecom
,s costs added only 34% (to reach USD 290.2)
because of increased payments to Rostelecom and a higher-than-expected
jump in labour expenses. However, the company
,s EBITDA climbed 71%, and
its operating margin nearly tripled y-o-y from a low base. However, the
operating and EBITDA margins remain the lowest in the industry at 6% and
17%, respectively.
Net income was USD 26.2 mn, and net margin stood at 8%. The bottom line
was higher than operating income because Far-East Telecom sold its stake
in mobile operator Primtelefon to MTS for USD 31 mn in 2004. Without the
effect of extraordinary items, the company
,s net margin would be only
4.5%, one of the lowest net margins in the sector.
Far-East Telecom
,s results show positive dynamics in their financials. The
company has quickly developed new services, and, given the soft
competitive environment in the region, it has a chance to gain a good
market share. However, we remain neutral about Far-East Telecom. The
company needs to seriously improve its operating efficiency if it wants to
become attractive to investors.

Money market

With momentum evident in the growth of the eurozone
,s services sector and
rumors that Middle East central banks are beginning to increase the
portion of euros in their FX reserves, the value of the Euorpean currency
hit a two-month high of USD 1.233 on Wednesday. The move pushed the euro
up against the rouble and allowed the rouble to gain ground on the
greenback, which slumped below RUR 28.5.
Despite the signs of life emerging from the EU economy, euro-dollar
dynamics remain under significant influence from technical factors. We
still think that when a balanced euro-dollar equilibrium is found, the
greenback may outperform the European currency. Factors supportive of the
dollar include the widening interest rate gap and a more solid pace of
expansion in the economy of the United States than that of the European
Union.

Bond market

The rouble bond market is retaining record low yields, backed by bouyant
liquidity and notable rouble strengthening against the dollar. Fitch
,s
upgrade of Russia
,s sovereign credit rating to BBB on Wednesday came as no
real surprise to the market. The mid-term effect of the move looks
unlikely to provide substantial upside to rouble bonds. Support from
tightening credit spread in Russian Eurobonds may be undermined by growing
yields in U.S. Treasuries. We still believe that upward movement is
limited as currently low yields do not quite conform to ongoing inflation.
Second- and third-tier bonds are still providing more attractive
opportunities for traders.
The sovereign sector of Russian Eurobond market reached a new record tight
credit spread to U.S. Treasuries with EMBI+ Russia index clocking in at
133 bps on Wednesday. The move was backed by a credit rating upgrade of
sovereign debt from Fitch. The currently low supply of sovereign Russian
eurobonds helped to reach that tight spread and will likely help to retain
it. However, the persistent yield growth from U.S. Treasuries can hardly
be ignored by the market and some yield expansion is likely. U.S. job data
for July, due Friday, may facilitate a downward move on the market as
strong employment growth increases the chances of a more prolonged period
of interest rate hikes from the Federal Reserve.
On Wednesday, the yield of the indicative Russia
,30 slumped 6 bps to hit
5.65%, while slightly weaker than expected readings for the ISM
Non-manufacturing index prompted a 4 bps fall in the 10-year UST.

Equity market

The Russian equity market, which has long appeared overbought, has finally
started to feel a correction. The announcement of a long-rumored upgrade
of Russia
,s sovereign debt rating from BBB- to BBB by Fitch
,s only
prompted investors to fix profits. We believe that the market needs a few
more days to take breathe after its prolonged rally
* expect a further
correction on Thursday.
As usual, major gainers of the past few weeks were the first to fall, with
Sibneft (down 5.36%) leading the pack of blue chips into the negative
territory, followed by Sberbank prefs (down 5.18%).The benchmark RTS index
plummeted by 1.2% to 780.9 on rather impressive volumes. In New York and
London enthusiasm over Russian stocks also evaporated: MTS and Vimpelcom
lost 2.17% and 0.9% respectively, while Golden Telecom fell 1.47%.
Unaffected by the general tendency were Gaprom ADSs and locals, always in
high demand by investors, showing growth of 1.65% and 1.21%, respectively.
The Brent spot price experienced a mild downturn of 0.9% to hit USD
60.15/bbl after the persistent rises of the recent weeks. However, this
does not signal a change in trend, which is likely to remain positive
because of political risks in oil supplying countries and technical
problems on U.S. refineries.