Russian Daily Monitor

Sistema eyes control of Bashkir oils

AFK Sistema is planning to diversify in order to diminish its dependence
on the telecommunications sector, the company
,s CEO Vladimir Evtoushenkov
said Thursday. One such step will be a larger than reported increase in
the company
,s stake in a series of oil companies in Bashkortostan,
Evtoushenkov said (initially Sistema claimed it intended to acquire only
25% of the companies). We think that Sistema would acquire controlling
stakes in the companies, and this has been partially confirmed by several
Sistema officials. We think control of the companies would be positive for
Sistema as the acquisition price would likely be far below the value of
the assets after restructuring.

Comstar reorganization in progress

MGTS
, Board of Directors is expected to consider an additional issue of
Comstar shares at its meeting on Friday, and the decision looks likely to
find approval. The emission is needed to allow Sistema to swap its 56% of
MGTS common shares for shares in Comstar. Our estimates suggest that after
the transaction, Sistema
,s stake in Comstar will reach 78% and MGTS will
only hold 22% of the company. As previously reported, the reorganization
,s
risk for MGTS looks substantial as it will withdraws a significant part of
MGTS
, growth potential. Besides, demand for MGTS shares will likely fall
significantly after the Comstar IPO scheduled for 1H06. For this reason,
we confirm our sell recommendation for MGTS.

Money market

The Russian FX market saw little change on Thursday as the euro-dollar
rate continued to float between 1.20-1.21 for the fourth straight day. On
Friday a stream of interesting data from the United States - including
August inflation and the latest figures on business and consumer
confidence for September
) may nudge the dollar out of the above-mentioned
corridor. On Friday, data on euro zone confidence indexes will also
attract attention. We would not rule out a minor dollar correction on the
downside, although the mid-term outlook assumes no significant weakening
of the greenback. The rouble, meanwhile, should follow euro-dollar
dynamics.

Rouble bonds

Early Friday, rouble liquidity hit its highest level for eight months
) a
move that in combination with dollar stabilization should support the
rouble bond market. Swelling liquidity simply reflects capital favoring
Russia and trade flows that [have should provide even more support for the
Russian market in the medium term. However, the share of foreign capital
on the market remains high, which makes it quite vulnerable to a shift in
global capital flows. And such a shift looks likely in the mid-term in the
wake of growing interest rates around the world.

Eurobonds

Russia
,s Eurobond market remains buoyant as further credit rating upgrades
appear likely for both local companies and the country as a whole on the
back of rising energy prices. As well as improving profits for oil and gas
producers, high prices are also boosting overall budget revenues and
providing a competitive advantage to local companies through lower energy
costs on the Russian market than abroad. As long as energy prices remain
high, Russian Eurobonds should attract strong demand.
In the mid-term, the benchmarks look likely to remain under the influence
of a continued bullish interest rate policy from the Federal Reserve, even
though recent data has shown a notable worsening of business and consumer
sentiment. Data from before September, on the other hand, pointed to firm
economic expansion and increasing inflationary pressure. As Fed policy is
aimed at containing mid- and long-term inflation, recent data appears
unable to provide convincing evidence for a temporary loosening.
Meanwhile, it is not clear whether the further interest rate hikes will be
able to bring an expansion in yields as economic imbalances look set to
prevail in the mid-term.
On Friday, the market
,s attention will be focused on a string of U.S. data
releases including inflation, personal spending and incomes in August as
well as the Chicago PMI and University of Michigan confidence indices.

Equity market

Technical factors, including strong oil prices and recent optimism on GEM
indices, should ensure growth on the Russian equity market on Friday
morning. By the end of the day, however, the
+Friday factor
, may put some
pressure on prices.
Lingering concerns about the degree of damage from Hurricanes Katrina and
Rita is supporting the oil price
) the indicative Brent improved 0.16% to
USD 62.94/bbl on Thursday
) providing some support for Russian equities.
The benchmark RTS grew 0.29% to 991.13 on the day, while in the middle of
trade it came very close to rehitting the 1,000 mark. There was reasonable
demand for Russian oil stocks: Lukoil added 0.89%, Surgut climbed 0.94%
and Gazprom
,s local shares and ADSs grew 0.24% and 2.24%, respectively.
Sibneft, meanwhile, continued its slump, dropping 3%. In New York, trading
was mixed: Lukoil and Surgut were again in the black, while MTS and
Vimpelcom saw declines of 1.7% and 0.71% respectively.