Russian Daily Monitor

Renova looks to recover VSMPO-Avisma stake

Vedomosti reported Tuesday that holding company Renova has initiated the
arrest of 73.4% of the shares of titanium products maker VSMPO-Avisma, in
which it previously held a minority stake.
Renova wants to cancel the results of the so-called \"Russian roulette\"
share option [in which VSMPO-Avisma\'s management bought out Renova\'s 13.4%
stake].
We think that Renova is hoping to get more money for the stake, as its
market price has increased greatly from when the option was executed. It
is possible that Renova plans to recover the stake and sell it during the
VSMPO-Avisma IPO, scheduled for 1Q06.
The chances of resolution of the conflict are uncertain. We think that the
controlling shareholders will manage to protect their interests but it may
take much time and thus can push back the date of the IPO. While
VSMPO-Avisma shares looks fundamentally attractive, the conflict around
shares may pressure the company\'s capitalization.

Money market

In the short term, the Russian FX market looks unlikely to deviate from
tracking euro-dollar trends.
The rouble strengthening should not have a significant affect on inflation
in the short-term, which means the Central Bank would unlikely allow deep
rouble appreciation if inflation threatens to surpass the government
,s
10-11% target for the year.
Globally, after notable dollar slippage, the greenback is starting to
strengthen again, backed by expectations of more hikes to the Federal
Reserve
,s target rate. Interest rate hikes in the eurozone, meanwhile,
appear less likely. Because of this transatlantic disparity, we do not
rule out a strengthening of the dollar relative to the euro in the coming
days on the back of likely higher U.S. inflation data for September. The
factor of eventual political clarification in Germany appeared to have no
effect on euro-dollar dynamics, which likely underlines the dominance of
interest rate expectations at present.

Eurobonds

After rapid yield expansion on the Russian Eurobond market, demand for the
papers may be restored again, likely prompting tighter spreads. However
the sovereign sector spread of 90 bps would require further credit profile
improvements or a new surge in oil prices -- evidently still the major
driver of demand for Russian assets.
The benchmark
,s move toward higher yields on the back of continuing
interest rate hikes should be limited, as investors increasingly rely on
the U.S. Federal Reserve
,s ability to contain inflation. Thus, despite
rising interest rates, investors may find it reasonable to increase the
share of dollar-denominated bonds in their holdings. As Russian papers
still look quite attractive compared to other emerging markets, we do not
rule out that Russian Eurobonds may be among the papers which could
benefit from any improvements in sentiment.

Equity market

With Monday
,s growth appearing technical, we expect the Russian equities
market to be weak on Tuesday
) and oil is unlikely to save the day. The
oil price has long since lost its momentum, with the indicative Brent
price declining 0.7% to USD 58.78/bbl on Monday on neutral newsflow. The
market has entered a period of consolidation and we are likely to see flat
trading in absence of breaking news.
The market grew Monday on dull trading activity. The benchmark RTS added
2.23% on the day, although there was no apparent reason for the optimism:
the trajectory likely reflects technical movement after the price slump at
the end of last week. Oil & gas papers ended in black with huge demand for
Bashneft, which climbed 5% on the (rather odd) expectation that AFK
Sistema will expand its ownership in the oil company via the market
transactions. VSMPO-Avisma was one of few losers, its shares dropping
5.54% on news of the conflict around the company
,s shares (see story
above). In New York, investors were positive on Russian oils. Demand for
the Russian mobiles is still low, however, in the absence of significant
news. Vimpelcom added only 0.02%, and MTS dropped 2.03%.