Daily Market Monitor: The Rouble bond market saw a day of corrections on Monday

Action planned on Gazprom-Rosneft

Russia’s Ministry of Industry and Energy has announced through its web
site that the government and top management of Gazprom and Rosneft have
finalised a plan of action for the merger of two companies. The
announcement cited Industry and Energy Minister Viktor Khristenko as
saying that the plan stipulates the main procedures to be completed by
June 8. Gazprom’s press service added that the adopted merger scheme was
that detailed by Gazprom CEO Alexei Miller two weeks ago.

Rosneft, meanwhile, might be targeting other YUKOS assets. Tuesday ,s
Vedomosti reports that the state company has sued YUKOS for damaging its
former subsidiary, Yuganskneftegaz, by using transfer pricing and asset
divestures. In particular, Yugansk does not own most of its fields ,
infrastructure. In addition to $5.1 bln of Yugansk tax debt, Rosneft is
now seeking a further $5.9 bln from YUKOS in diverted earnings.

With the lawsuit, Rosneft might be effectively trying to secure YUKOS ,
remaining assets for itself, which doesn’t seem to fit well with the
merger story. We are encouraged by the fact that the government is backing
the merger and thus the liberalisation of Gazprom’s share market. At the
same time, the adoption of the merger plan may (or may not) eventually
prove an important step towards the merger. With Rosneft’s commitment as
far from evident as ever, we do not expect the market to crack open the
champagne just yet.

Money market

A dollar rebound against the euro put the Moscow money market under
pressure on Monday as the euro rate fell from 1.36 to 1.33. As a result,
the local market began to feel nervous, leading to a fall in short dollar
positions, but the global shift was not enough to reverse the
rouble/dollar rate trends and the U.S. currency closed at Rub 27.49.
We see international markets dynamics as remaining the major factor
influencing the dollar exchange rate on the local market in coming days,
with the country-specific factor likely to prove less important. However,
the fundamental upward pressure on the rouble from huge export revenue
inflow remains the factor directing the dollar/rouble exchange in the
mid-term.

Bond market

The Rouble bond market saw a day of corrections on Monday. The pause in
rouble appreciation removed some momentum, and the strong rouble alone was
not enough to support purchases. The yield increase on international
markets (U.S. treasuries in particular) exerted a negative influence on
the rouble bond market, which earlier had been offset by exchange rate
dynamics. We believe that the rouble bond market passed its local price
maximum last week, so a correction seems the most likely scenario in
coming days. However, we do not expect it to be significant. After all,
there is little doubt about a strong local currency in the mid-term. In
addition to rouble liquidity, that should remain the main supportive
factors for the market.

Meanwhile, the Central Bank plans to place its OBR-2 issue Tuesday, with
an issue volume of Rub 98.5 bln. The technical placement of the paper for
a one week term took place on March 3. Now the put option is set for
September 15. However, this time the issue would likely be placed in parts
over some period so that investors will have an option to purchase
short-term rouble bonds without issuing multiple issues smaller in volume.
The placement should create a short-term benchmark for the rouble bond
yield curve.

The Moscow city government has plans to issue a rouble bond with a
maturity of up to 30 years according to Vedomosti. The Moscow debt agency
is preparing amendments to the Moscow budget code that would allow this
(the current maximum is set at 10 years). We do not see the urgent
necessity for such a long issue in the near future. It may be more optimal
to issue shorter bonds and then refinance them ) the City of Moscow has
experience of many successful operations of this kind. However, 30-year
bonds may have an advantage in the future.

The Russian Eurobond market experienced a decline following a fall in
global emerging markets. The sovereign spread increased 12bps to 193bps,
while the Russia’30 yield increased the same by the same amount to 6.53%.
The move was likely profit-taking in the expectation of further benchmark
yield increases. We believe that the correction has increased the spread
to the level where benchmark dynamics are becoming the main factor of
influence. The latter should be influenced by a series of U.S. economic
releases on Tuesday: February advance retail sales, January business
inventories and March’s housing market index are all due.