Fixed Income Comment: The announcement by the Ministry of Finance that Russia could repay as much as US$10 billion of Paris Club debt supported Russian debt prices

Whilst sentiment towards Russia remains favourable, and the news that
Gazprom\'s potential acquisition of Yuganneftegas suggests the Yukos affair is
finally drawing to a close, concerns remain regarding the overall performance of
the economy. The real appreciation of the Rouble, only in part a result of the
erosion of the US$, may have an increasing impact on domestic industrial
performance and contribute to the easing of growth in real GDP, with some
forecasters anticipating that 2005 could see growth slip to 3-4% compared with the
anticipated outturn of 6.9% this year. Any slippage in the oil price could serve to
compound this trend. Although the Russian Federation has been successful in the
accumulation of funds set aside for the Stabilisation Fund (currently expected to be
US$16.4 bln as of Dec 1) and overall foreign exchange reserves stand at
US$113.9 billion, lack of access of corporates to working capital remains one of
the principal constraints to achieving the doubling of GDP within a decade.
Moreover with the planned full convertibility of the Rouble now as little as 24
months away, serious progress on financial sector reform is required urgently if
this target is to be achieved.
The announcement by the Ministry of Finance that Russia could repay as much as
US$10 billion of Paris Club debt supported Russian debt prices, despite further
deterioration of the political situation in neighbouring Ukraine. RU30 opened this
morning at 99.75. In general, however, the market has eased as a result of the
weakening of US Treasuries.