Russian Daily Monitor

Megion to pay USD 1 bn in dividends

Megionneftegaz, Slavneft
,s key upstream subsidiary, will pay an interim
dividend of about USD 920 mn, representing nearly all cash accumulated
over four years of a virtually non-existent dividend policy, news agencies
have reported. Some 95% of the sum will go to the mother company, with
chances high in our view that Slavneft in turn will redirect the cash to
its two owners, TNK-BP and Sibneft.
Megion\'s minority shareholders should be more than pleased with the news,
after they sued Slavneft on several occasions for depriving Megion of its
profits through transfer pricing and other unfair treatment. However,
Slavneft
,s change from bad boy to poster child might be related more to
Sibneft owners squeezing cash out of their businesses before a presumed
sale to Gazprom. Megion shares should jump today but slump on Tuesday as
they go ex-dividend, with the investment case for Megion minorities (hopes
that Slavneft concedes a rich payout) played out as cash leaves the books.

Sistema Moves Into Oil Business

Sistema has taken a step away from its telecoms focus, purchasing stakes
in Bashkiria oil extraction and refinery assets from Bashkir Capital, the
company close to son of Bashkiria
,s president Murtasa Rakhimov, the
holding reported on Friday. Sistema has acquired 19.9% of Novoil, Ufimsky
NPZ, Ufaneftekhim, ANK Bashneft and Ufaorgsintez; 18.57% of
Bashnefteproduct; and 10.08% of Bashkirenergo. The company also intends to
expand its ownership in several companies to blocking stakes. Sistema paid
USD 502.9 mn for the stakes, while on Friday the market capitalization of
the acquired assets was USD 674 mn.
Sistema said the acquisition was a purely financial investment and argued
that since uncertainty remained about the privatization of Svyazinvest,
Sistema decided to use funds raised through IPO in January 2005 to finance
this transaction. Sistema
,s CEO Vladimir Evtushenkov said Friday that the
company, in cooperation with Bashkir Capital, intended to create
vertically integrated oil company with a single profit center and
transparent cashflows. Sistema said that it would increase the value of
acquired assets and the holding would then sell them at a premium.
The acquired assets look rather risky, however, and that could explain the
discount in the price paid. The Russian Accounting Chamber is still
disputing the privatization of Bashkir oil assets. However, Sistema
,s CEO
said the risk of nationalization is exaggerated. We hope that the
acquisition will indeed turn out to be a straightforward financial
investment: Sistema is not familiar with oil sector, and excessive
diversification would threaten the holding
,s value. Moreover, there is
still a risk that Sistema (which is currently short of money) will have to
borrow heavily before taking part in the Svyazinvest privatization, and
this threatens the company leverage and financial stability.

Russian mobiles
, prices may feel pressure

Sistema, the controlling shareholder of MTS, reported Thursday that it
does not intend to exercise an option that would have allowed it to buy
the 10.1% of MTS currently held by Deutsche Telecom. The latter intends to
sell the stake, in line with its strategy of uncontrolled assets
management, and should jettison the asset by the end of 2005.
Deutsche Telecom, which initially held 25.1% in MTS, sold a 15% stake in
December 2004 by issuing additional ADRs. The placement led to 20% decline
in the MTS share price because of the increase in the free-float. Sistema
then reported it would buy the remaining 10.1% stake in MTS to prevent
further price pressure.
However, Sistema, which on Friday announced the purchase of Bashkir oil
assets, and which is preparing for the privatization of Svyazinvest, would
have little economic reason to buy the stake as it already controls MTS.
We think Sistema may ask for 15-20% discount to the current price of USD
1.4 bn, which DT would be unlikely to agree to. It will be difficult for
DT to find either strategic or portfolio investor for the stake, and DT
should thus place it on the market.
Putting the stake on the market might lead to a decline in MTS
, share
prices, even if Deutsche Telecom undertakes a brilliant road show.
Vimpelcom may be also threatened as extra free-float from MTS would be
viewed by investors as extra free-float of Russian mobile assets.
Considering this, we expect that MTS and, maybe, Vimpelcom
,s share price
may feel some pressure until DT finds a buyer for the stake.

Money market

Last week the dollar slid to RUR 28.35 while the euro climbed to 1.24
against the greenback as the Russian FX market continued to track the two
global currency heavyweights. Of late, the dollar has been experiencing
downward pressure from technical factors which in effect inoculated
euro-dollar dynamics from the effects of a stream of strong economic data
from the United States. As the euro-dollar rate approaches more balanced
levels, the relative strengths of the currencies will become more
sensitive to changes in fundamentals, such as interest rate expectations.
Upcoming U.S. inflation data for July, due on Tuesday and Wednesday, may
back the Federal Reserve
,s intention to continue tightening in order to
temper mid- to long-term inflation. Despite that recent labor market data
saw minor pressure on prices continuing economic expansion creates a
long-term upside risk for inflation. For this reason we would not be
surprised to see dollar rebound against the rouble in the mid-term.
On Friday Russia
,s Central Bank said that controlling inflation will
become its priority in 2006, stipulating the use of instruments that would
help contain growth in the money supply. However, the Central Bank said it
will continue exploiting its currency basket while managing the exchange
rate. We do not expect significant changes in bank
,s policy from those
seen currently. Since the start of the year the Central Bank has mainly
been watching exchange rate dynamics from the sidelines (persistently
building up FX reserves that do not distort the market) while FX market
dynamics have remained under the control of global exchange rate
movements. We believe the inflation goal will be primarily handled by debt
and money market operations to the extent that the Central Bank
,s
instruments allow.

Bond market

The rouble bond market last week found support from both abundant
liquidity and rouble strengthening against the dollar, which makes rouble
denominated instruments more attractive. The market was also buoyed by
yield tightening on the Russian Eurobond market. As long as the rouble
remains strong and liquidity volumes allow the short-term money market
rates to float below 3%, rouble bonds will likely keep their currently low
yields. However, closer to the end of the week the market is set to feel
some liquidity contraction ahead of tax payments scheduled for next week.
We do not expect significant movements in any direction.
The spread of sovereign Russian Eurobonds returned to 136 bps on Friday
after reaching a record tight 125 on Wednesday of last week. In part, such
waves in the credit spread are driven by U.S. Treasury movements, while
the Russian sovereign sector is demonstrating relatively less activity. We
believe the sovereign spread may approach 120, likely backed by an
anticipated credit rating upgrade from Moody
,s in the mid-term. However
the moves on the Russian Eurobond market will continue to be driven by
U.S. Treasuries. On Monday, the upcoming Empire Manufacturing index may
confirm that the U.S. economy is still on track for strong economic
expansion, leaving no real concerns that the Fed would stop tightening
monetary policy in the mid-term.

Equity market

Trading in Russian equities was quiet on Friday. After an early morning
push, momentum slipped away
* the benchmark RTS index finished the day
just slightly up (+0.7%) on average volumes of USD720 mn. Trading was
mixed with most blue chips losing ground. Market yardstick LUKoil (-1.7%)
led the pack. Surgutneftegaz plummeted by 1.2%, Novatek lost 0.7% and
Gazprom ADSs declined by 0.7%. Overnight, MTS (-3.2%) was hit hard on
fears of potential stock overhang following Sistema\'s refusal to exercise
its option to buy an additional 10.1 % stake in the company from Deutsche
Telekom (see story above). Tatneft, on the other hand gained some 1.7% and
Transneft prefs outperformed the market with a spectacular gain of +7.4%.
Friday
,s lackluster performance may way spill over into Monday as the
market gropes for firmer footing. That said, global enthusiasm for
emerging market assets and rich domestic liquidity on the back of
ever-high oil prices (Brent prices continued their upward march to USD
66.4/bbl) should support Russian equities in the medium term.