Russian Daily Monitor

Central bank ups euro weighting

The Central Bank announced on Friday that the euro
,s weighting in the
dollar/euro currency basket -- used for short-term exchange rate targeting
-- would increase from 35% to 40%. The direct result of the adjustment to
the currency basket will be increase in daily volatility of the
rouble-dollar rate, while the daily rouble-euro rate should become more
stable. In the medium term, the Central Bank will continue targeting the
nominal effective rouble rate, using a wider basket of foreign currencies.
The bank has never disclosed what currencies are included in its
econometric calculations, but our own estimates show that the nominal
effective rouble dynamics can be modelled simply by using equal weightings
for the dollar and the euro. We expect the bank to continue converging its
short and medium term targets and expect further adjustments to the
currency basket in the medium term.

Reiman accused of asset theft

German investigators examining a long-running suit over Commerzbank
,s
alleged involvement in money-laundering have accused Russia
,s telecoms
minister, Leonid Reiman, of asset theft in Russia, Vedomosti reported
Monday. According to the investigators, Reiman directly participated in
the dilution of a stake in St. Petersburg alternative operator
Telecominvest, held at the time by the St. Petersburg Telephone Network
(the predecessor of North-West Telecom). Furthermore, Reiman is accused of
eventually acquiring Telecominvest, and of helping to set up schemes to
hide his ownership of the company. Telecominvest now is the third largest
alternative fixed-line operator in Russia, and the owner of ©3 mobile
operator MegaFon.
We view the accusations as linked to the upcoming privatization of
Svyazinvest (due in 2H06). There were reports that the investigation was
initiated by Alfa, which appears ready to prevent other potential bidders
from taking part in the Svyazinvest contest.
Earlier speculation suggested that a consortium including AFK Sistema and
Telecominvest would be the most likely buyer of Svyazinvest. The current
allegations confirm our general view that there is no clarity about who
will eventually take control of the state telecoms holding.

Money market

The greenback gained 15 kopecks on Friday, as market players took the
Central Bank
,s lead. We expect the rouble to weaken further -- hitting 29
by the end of the year according to our forecast. Apart from inflation,
the Central Bank is targeting real rouble appreciation and December
,s drop
in nominal exchange rate is the way the bank usually achieves that target.

Eurobonds

The Russian Eurobond market advanced slightly on Friday on increased
demand from foreign investors for global emerging market debt. As a
result, the Russia
,30 yield declined 3 bps to 5.62%. The benchmark UST
,10
traded unchanged at 4.52% on the release of new U.S. economic data on
unemployment, which failed offer additional arguments for the Federal
Reserve to maintain its interest rate hiking campaign.
The EBMI+ Russia spread declined 3 bps as a result to 108 bps, and we
expect the spread to shorten as global funds
, interest in emerging market
bonds provide support for Russian debt.

Equity market

We expect to see another boost for the Russian equity market on Monday as
crude prices traded higher over the weekend and global sentiment towards
equities remained bullish (the NASDAQ traded up 0.27% on Friday). That
said, the recent rally in Russian equities has resulted in relatively
stretched valuations under the standard DCF-based and multiples-based
approaches. And there appears to be further scope for overshooting on the
upside due to the technical drivers of recovering liquidity and the oil
price. The removal of Gazprom
,s limitations on foreign ownership and
NLMK
,s IPO (if successful) would also boost the market.