Russian Daily Monitor

Sistema increases Bashkortostan stakes

AFK Sistema announced Monday that it had increased its stakes in several
oil companies in Bashkortostan to its target levels. Sistema currently
holds 25% in Bashneft, 28.17% in Novoil, 25.52% in Ufimsky NPZ, 22.43% in
Ufaneftekhim and 24.87% in Ufaorgsintez. The Sistema holding in
Bashnefteproduct remains at 18.57%, while the holding cancelled the
acquisition of Bashkirenergo. Sistema paid USD 599.7 mn for all the
stakes, a price well below their combined current market capitalization.
Sistema said the current stakes should allow it to become a blocking
shareholder in the companies. If Sistema plans to acquire controlling
stakes in them, it will do so by means of a private transaction. As
Sistema will no longer buy stakes on the market, we see no reason for
further growth from these companies at the present time.

TNK-BP to complete share swap

TNK-BP said in a press release that it collected offers for the share
swaps of 14 operating subsidiaries into shares of TNK-BP Holding, and
would complete the swap by November 15. The news confirms that the
restructuring process of TNK-BP is on track, and we believe the TNK-BP
stock has all chances to become a listed blue chip in 1Q06. We do not
exclude that controlling shareholders sell a small extra stake in 2006 to
boost free float.

Blavatnik plans to participate in Svyazinvest privatisation

The owner of Access Industries Leo Blavatnik, who currently holds a
blocking stake in Svyazinvest, has said he intends to participate in the
privatisation of the telecoms giant, scheduled for 1H06. We always
believed that Blavatnik would take part, either by himself or in
association with Alfa Group (a partner of Blavatnik in TNK-BP).
Blavatnik
,s intention to participate in the privatisation reduces
Sistema
,s chances of winning the contest and we still see no obvious buyer
of Svyazinvest at the present time. However, the growth in number of
pretenders should allow the state telecommunication holding to at least
find a fair price.

Government eyes sweeter Urals

The government is mulling tax breaks for Volga-Urals oil producers --
Tatneft and Bashneft above all -- in exchange for a denial of access to
export pipelines. This could improve the quality of the Urals grade, whose
quality suffers from the small amounts of very sulphur-rich crude added by
producers in the region.
We believe the proposal has a number of drawbacks, such as legal issues,
difficulties with determining appropriate compensation, and the
unavailability of sufficient refining capacity to use the sour crude. But
the idea is worth a second look. In particular, in the longer term it
might be sensible to install desulphurisation capacity in the region, to
bring its quality up to the Russian average.

Money market

The euro rate has fallen below 1.19 USD on a number of factors, including
the inconclusive German elections, strong U.S. economic data, and remarks
by a top U.S. Federal Reserve official that interest rates still have a
long way to climb. With potential dollar-supporting news largely
exhausted, and the euro languishing at lows not seen since the beginning
of July, the euro seems to be heading for a reversal
) likely to be
triggered by news of a coalition government in Germany.
Following global trends, the dollar also looks comfortable in Russia,
adding almost 10 kopecks Monday. Recent anti-inflationary rhetoric by the
Russian government fuelled expectations that the Central Bank would
devalue the euro-dollar basket vs. the rouble
) but this hasn
,t happened.
Accordingly, the market is currently short the basket but the Central
Bank obviously has its own opinion about the exchange rate.

Rouble bonds

The week (and the quarter) started enthusiastically on the rouble bond
market, but gains had been reversed by Monday evening as strong U.S.
economic data sharply lifted US Treasuries and Russian Eurobond yields.
This came as a somewhat rusty reminder that rouble debt once correlated
with other market factors
) such as the rouble-dollar exchange rate or the
oil price
) rather than just soaring rouble liquidity.
With prices inflated by Russian speculators, it is crucial for foreign
funds to replace them. Of late, we see demand in blue chips with a
duration of about one year, apparently coming from low-cost houses likely
to hold the papers to maturity. Meanwhile, domestic interbank rates are
also close to the ground, with the one-year rate depressed by an overnight
rate that is virtually zero. This acts to decrease the cost of funding on
the Russian market and supports primarily the short and medium segments of
the curve. We believe the exposure of long issues to the interest rate
risk is skewed to the downside at current highs.
The week will see a number of third-tier corporate placements, worth RUB
7.5 bn in total, of which the largest is Uralvagonzavod-Finance
,s second
issue scheduled for Wednesday. The bond
,s parameters are somewhat
aggressive (term
) 5 years, volume
) RUB 3 bn), and we expect the issue to
place at about 10.4%-10.9% yield to maturity.

Eurobonds

The prospects of a further rise in interest rates in the United States
appear to be on the up after the release of new data showing growing
inflation. As a result, the benchmark UST
,10 yield grew 6 bps to 4.39%,
and the yield of the indicative Russia
,30 bond grew 5 bps to 5.34%. As a
consequence, the EMBI+ Russia spread widened 1 bps to 93 bps. In the short
term, further yield growth in U.S. Treasuries looks possible due to
technical factors, while the Russian spread is likely to remain stable
because of the good macroeconomic situation at home.

Equity market

After significant growth on Monday there is a risk of consolidation on the
Russian equity market on Tuesday. On the other hand there appear to be a
lot of investors looking to join the growth and each downward movement is
likely to trigger more purchases. Considering the rich liquidity and an
appreciating rouble, the likelihood of continued growth in the mid-tem is
increasing rapidly. Although prudent investors will take into account
fundamental values, which are already rather stretched for certain stocks.
The market continued its triumphant march towards new highs on Monday as
hunger for Russian oil and metals papers was not met. Lukoil
,s share price
rocketed 4.42% to USD 60.3 (a mark that would have seemed unbelievable
back in June 2005), Surgut climbed 2.41%, Norilsk Nickel added 3.34% on
strong base metals prices. Gazprom
,s local shares gained 1.04% while ADSs
lost 0.9%. Bashneft grew 9.11% on purchases by AFK Sistema. As a result,
the benchmark RTS index climbed 3.08% and closed at 1038.76. ADR trading
in New-York mirrored trade in Russia: there was a demand for Lukoil,
Surgut and Norilsk Nickel, and Sibneft dropped about 2%. Rostelecom
climbed 5.27% because of coming Svyazinvest privatization, while Vimpelcom
and MTS dropped 0.86% and 1.3%, respectively.