Russian Daily Monitor

Rosneft may not consolidate Yugansk

State-owned oil company Rosneft may refuse to consolidate Yuganskneftegaz,
whose preferred shares are still controlled by Yukos, Vedomosti reported
Tuesday. Under an appraisal carried by the Deloitte consultancy, Yukos
would become a minority shareholder in Rosneft if Yugansk was
consolidated. Such a scenario would not suit Rosneft, which is likely to
try to either reappraise its subsidiaries, or not consolidate Yugansk at
all. Current rumours suggest that Rosneft has chosen the latter course.
While the delay in a decision on the consolidation of Rosneft
,s
subsidiaries would cause delays to the company
,s IPO due in 1H06, we do
not expect that the timing will be seriously disrupted. Neither do we
expect that the failure to consolidate Yugansk would greatly affect
Rosneft
,s price at IPO, as the company controls 100% of the voting share
in the subsidiary. The only looser from a faliure to consolidate Yugansk
would likely be Yukos, which would probably not receive a fair price for
its stake.

Money market

While the money market overnight rate continues to slide from last week
,s
highs, the MosPrime rates (1 to 3 months maturity) has been reluctant to
fall, reflecting the continuing strong demand for longer money. However,
towards the end of the year, liquidity on the money market is expected to
improve on rising budget outlays.
Dollar trade on the local market remains around 10 kopecks higher than
levels seen last week. We are inclined to see the current dollar price as
relatively high, the result of speculative forces to some extent. We do
not rule out moderate dollar depreciation against the rouble in the
absence of global greenback gains.

Eurobonds

The Russian Eurobond market saw a weak trade on Monday, with noticeable
activity only in the most liquid papers. On the whole the Russian papers
continue to track the benchmarks, while the latter remain under the
influence of the recent strength of U.S. economic data. On Tuesday, Q3
data on U.S. Nonfarm Productivity and Unit Labor Costs should shape trade
in U.S. Treasuries. Evidence that productivity is improving much faster
than the rise in labor costs should help to ease concerns of rising
inflationary pressure from the expanding economy.
On Monday the Russia
,30 saw a 4 bp yield expansion mirroring a 5 bp rise
of the 10-year UST yield. The EMBI+ Russia spread hit 109 bp, up 1 bp on
the day.

Equity market

We expect the Russian equity market to drift sideways on Tuesday
considering that it appeared to have lost its stamina for growth on
Monday. Russian ADR dynamics were unimpressive in New York, and GEM
indexes indicated a lack of direction, confirming our view. Some support
may come from the oil price: the indicative Brent price grew 1.35% to hit
USD 56.33/bbl on Monday as cold weather finally arrived in the United
States. In the mid-term, investors expect to see a Christmas rally, and
that is providing additional support for the market.
Russian equities were flat on Monday, propped up by the demand for Lukoil
(+1.02%) and Sberbank (+0.8%). The other blue chips closed in red, while
the benchmark RTS index added 0.27% to close at 1076.02. ADR trading in
New York mirrored directionless movement in Russia, offering few surprises.