Russian Daily Monitor

Vimpelcom prepares for WellCom acquisition

Vimpelcom
,s EGM, held on September 14, supported the acquisition of the
Ukrainian mobile operator WellCom, after finding support from the
company
,s minority shareholders. The Board of Directors of Vimpelcom
considered the results of the EGM on September 16, 2005, affirming the
validity of the shareholders
, decision with five directors in favour and
three Telenor representatives against. While there was no clear guidance
given by the Board about the further actions in the Ukrainian market, the
company
,s CEO Alexander Izosimov said that Vimpelcom
,s management is
planning to finalize negotiations over the acquisition of WellCom.
We think that there will be further conflict around the Ukrainian
expansion, however, as decisions by the company management, EGM and Board
may be found invalid in court. However, the Ukrainian deal provides
Vimpelcom with a foothold to develop in the second largest market in the
CIS, and we would side with the management in the conflict.

Gazprom chooses probable partners for Shtokman

Gazprom named a short list of possible partners to help the Russian giant
to explore the Shtokman field, one of the country
,s largest, with proven
reserves of 3.2 trillion cubic meters of gas and 31 mn tons of condensed
fluid. The companies named include Hydro, Statoil, Chevron, ConocoPhillips
and Total. It is expected that Gazprom will eventually choose three of the
above. Start-up costs for exploration are estimated at USD 10 bn, and the
whole project could cost USD 15-20 bn. This news is positive for the
company since it will allow the monopolist to expand gas production.

Wimm-Bill-Dann reports 1H05 results

Russian dairy and beverage company Wimm-Bill-Dann has reported 1H05
results under U.S. GAAP that show the company has been unable to overcome
margin stagnation in its dairy business and expand sales in beverages.
Sales grew by 17% to USD 681.7 mn, mostly because price increases in the
dairy segment. The company
,s beverage sales, meanwhile, grew only 5.4%,
dropping in physical volume, while the company
,s main competitor
Lebedyanski managed to expand its juice sales by 23% y-o-y. On the cost
side, the company again suffered from higher raw milk prices, and its
gross margin remained unchanged at 28%. As for the bottom line, the
company
,s

net income dropped 36% because of higher raw milk prices and higher
interest expenses, and net margin stood at 1%.
The results confirm our main fears about the business. It is still unable
to improve the marketing of juice products and to control its costs in the
dairy segment. We expect the company will suffer from high competition in
the juice market and rigid milk supply. We do not expect any surprises
from the company
,s financials or share price dynamics in the near future
as the problems facing the company are not of the kind that can be solved
shortly.

Money market

Last week saw some diversion in rouble dynamics from the Central Bank
,s
currency basket rules, with the Russian currency gaining about 10 kopecks
against the dollar last Wednesday as the euro-dollar rate remained flat.
The pressure toward nominal rouble appreciation is obvious as its current
artificially low level is maintained by the Central Bank
,s massive
purchasing of foreign currency. We believe the move toward a stronger
rouble in nominal terms has been motivated by Central Bank attempts to
restrain this year
,s inflation from exceeding last year
,s 11.7%. As long
as this goal is pursued the Central Bank will be likely to bid the dollar
lower than the currency basket rules stipulate. Meanwhile, the Central
Bank should continue build up its FX reserves and intraday rouble dynamics
will depend on moves in the euro-dollar rate.
The first data releases for September were unable to push the dollar
lower, while this week does not promise much in terms of economic
releases. Therefore, ahead of the FOMC meeting on September 20, which
looks set to give another 25 bps hike to the Fed
,s target rate, we believe
the dollar may gain the ground against the euro or at least stay close to
four-week high 1.215 reached Monday morning. Meanwhile, the election
result in Germany is another factor that may secure a stronger dollar
against the euro in the coming weeks as planned reform programs may be
thrown off course by a lack of a clear mandate for either major party. As
a result, the greenback may test 28.5 roubles.

Bond market

On the back of abundant liquidity, causing short-term money market rates
to hit a four-month low, the rouble bond market saw mixed dynamics on
Friday. Moscow city papers went up both at the short-end and long-end of
the curve, with the Moscow 39 yield tumbling to 7%. In the sub-sovereign
sector, the 5th and 7th issue of Komi republic debt gained the most on the
day, as did a second issue of Leningrad region with all papers up by more
that 1 p.p. In the corporate sector the were no significant moves,
although papers of metals and mining companies moved marginally toward
tighter yields.
Although we move into the second half of the month, which promise some
liquidity tightening on tax payments, the tax factor will not be the only
one in prodding a likely liquidity squeeze, as more than Rub 18 bn is set
to be absorbed by primary market placements this week. However, we would
rule out any significant downward moves as the local debt market has
proved its resistance to a worsening of short-term liquidity.
In the coming days, the Russian Eurobond market looks to be stuck on a
negative trend as U.S. Treasuries keep on tumbling ahead of the FOMC
meeting on September 20. However the move in benchmarks has been more
pronounced, allowing the country spread to reach a record tight 102 bps on
Friday. At the same time, we think that, unlike past months, moves in
sovereign papers should be more benchmark-induced as many the local
factors seem to have already been priced in.
This week
,s spotlight is on the upcoming interest rate decision by the
FOMC, which is expected to bring a 25 bps hike to the federal funds target
rate. Most attention will be focused on how Federal Reserve policy makers
assess the prospects of the economy in the aftermath of Hurricane Katrina
and surging oil prices. So far Fed officials have not let slip any change
to their commitment to tighter monetary policy, although the market has
been taking the opposite view.

Equity market

On Friday, the Brent price dropped 3.35% to USD 60.1 due to a decline in
OPEC
,s oil consumption forecast. However, the Russian equity market
reached new highs on the day, supported by exceptional demand for Russian
oil and gas stocks, triggered by expectations of brilliant Lukoil
financials. The RTS benchmark closed at 923.03, gaining 1.78%. Lukoil
gained 4.83%, Gazprom local shares soared by 2.42% and Surgut climbed
5.11%. Demand for Russian oil and gas ADRs was also high.
We expect the optimism about Lukoil financials to continue, and somewhat
upward movement is still possible on Monday in spite of some slippage in
the oil price.