Russian Markets Research April 9-15, 2007
Macroeconomic Indicators:
Real disposable income to rise faster than expected in Russia The Russian Economy Ministry adjusted forecast of real disposable income: 2007 to 9,8% (+0,3%), 2008 by 9,1% (+0,3%), 2009 to 8%.
Inflation forecast kept unchanged The inflation forecast was left unchanged. Inflation will reach 7-8% in 2007, 6-7% in 2008, 5.5-6.5% in 2009, and 5-6% in 2010.
Russia posts Q1 2007 budget performance According to the Russian Finance Ministry’s preliminary report, Russia’s federal budget surplus amounted to USD18.20bln in Jan-Mar 2007. Budget’s revenue stood at USD54.82bln, or 90.4% of the target. Budget spending was USD36.62bln, or 72.7% of the target. In Q1 2007 the Federal Tax Service transferred USD26.00bn to the federal budget. As of April 1, 2007, the Russian Stabilization Fund reached USD108.48bln.
Gold and foreign currency reserves up $7.6bn Russia’s gold and foreign currency reserves stood at $346.3 billion as of April 6, 2007, up $7.6 billion or more than 2% from $332.6 billion a week before, the Central Bank of Russia has reported. The reserves have extended gains into a sixth consecutive week. During this period they increased by $35.2 billion, or 11%.
Russian IPOs attract foreign investors Recent IPOs showed that there is strong foreign investor interest in Russian companies, specifically in the banking sector. IPO’s of Russian companies result in an upsurge in demand for rubles and higher capital inflow.
International trade and cooperation:
US is preventing Russia from accession to the WTO US is preventing Russia from accession to the WTO by delaying in Jackson-Vanik amendment cancellation. Pekhtin pointed out that if the US did not cancel the amendment, Russia’s participation in the organization would be impossible.
Russia hopes to complete WTO talks in H1 2007, now adjusting its legislation.
Development of energy and metallurgy in the Far East The Russian Federal Atomic Energy Agency (Rosatom) and United Company RUSAL will carry out joint long-term investment projects, include construction of nuclear power and aluminum plants in the Far East.
Russia seeks to ban weapons deployment in space Russia has drafted an international agreement banning the deployment of weapons in space, and the use of force and threats with regard to space facilities.
Russia mulling pipeline routed around Belarus The Russian Industry and Energy Ministry has introduced to the government a draft decree on the construction of an oil pipeline (“the Baltic Pipeline System (BPS-2)â€), which would be routed around Belarus.
Russia investing heavily in Armenia’s economy Russia is the biggest investor in Armenian economy (investments to energy, nuclear, transportation, and communication industries). Trade turnover between the two countries surged 70-80% and exceeded $500m over the previous years.
Russia and Egypt to cooperate on oil and gas exploration Russia will take part in exploration of oil, gas and gold fields in Egypt in cooperation with Egypt’s state oil company Petrojet.
Russia to cooperate more extensively with Pakistan, Russian PM says Pakistan is one of Russia’s top-priority partner countries in terms of economic cooperation. Russia is willing to boost trade between the two countries. He explained that trade between Russia and Pakistan barely exceeded $400m at the moment and could be increased significantly in the near future. Gazprom may plan Pakistan’s gas industry development. Inter RAO UES may also construct power supply lines in Pakistan.
Russia and Algeria to ensure gas supplies Russia and Algeria will be able to ensure natural gas supplies to consumers. Russian Foreign Minister Sergei Lavrov said that Russia and Algeria’s actions were in line with the concept of gas supplies, which was passed at the G8 summit in St. Petersburg.
Economic trends:
Mobile phone sales grew 12% in Q1 2007 Mobile phone sales grew 12% to $1.41bln in Russia in Q1 2007 compared to the same period a year earlier.
Foreign car sales grew 74% in Q1 2007 Foreign car sales grew 74% to 125,210 cars in Russia in Q1 2007. Most popular were Ford (39,071 cars), Chevrolet (36,735 cars), Toyota (29,368 cars).
The review of Russian economy
Sources: Goskomstat, The Russian Economy Ministry, The Russian Finance Ministry, The Russian Industry and Energy ministry, RBC.
Russian Debt Market
Source: Reuters
MM: Last week MM surprised its actors. On Monday the total balance on C/A and deposit accounts with CBR has rised by 90,2 bln rubles, which led to O/N deposit rate decrease by 0,4%. Last week O/N rate lay in the narrow band of 2,95–3,15%, except for Thursday when all time high trade volume was observed on currency market. This renewed 2006’s high at US$8,6bln in Aug. TOD&TOM’s trade vol was above US$10 bln. More than US$9 bln was sold on TOM. Not only market participants were not ready for such high trade volume but also trade system itself that went down and not functioned for some time. Trade volume exceeded the maximum permissible trade volume, which was set by the trading system. It is thought that one of market participants sold currency directly through MICEX instead of selling it as usual directly to CBR. CB interventions were at record high. According to some data sources CBR bought US$8 bln.
Total change in balance on C/A and deposit accounts with CBR amounts to +163 bln rubles compared to previous week. Liquidity on MM rised considerably, which should lead to fall in O/N rates this week to approx. 2-3% range.
Consistency in C/A balance shows levels where payment system works without tensions (except for days of tax payments).
Increase in C/A on Monday & Tuesday can be also associated with receipts from the budget because financing of expenses usually rise in the beginning of a quarter.
DEBT MARKET: This year default risk was in the band of 0,91-1,20. Most investors hold Russia 30 for long-term, that is why any short-term spread volatility depends on UST in full.
On Monday and Tuesday trade volume on Russian debt market was low and remained quite low till the end of the week. On Monday Russian 30 quotes declined which was a reaction to US Treasury’s yield increase on Friday previous week. US: investors do not want to sell risky debts while US economic statistics promises even slow consistent growth with Fed rate kept stable.
By Friday trade activity slightly increased. EMBI+ spread up 2bp to 96bp. EMBI+Rus spread up 3bp to 160bp.
See this week’s new bonds issues at the end of this report in “This week’s agenda†section.
Russian FX Market
USD/RUB rate was traded in the band of 25,79–25,91 following the EUR/USD rate last week. General trend of strengthening of Ruble against US Dollar continues and even becoming stronger.
EUR/USD: French industrial production grew 1.1% in Feb, the most in seven months. German exports advanced for the first time in four months in Feb, led by an increase in sales to other European countries. Dollar remains under big pressure. The Euro rose to near a two-year high against the Dollar as signs of faster economic growth in Europe prompted traders to boost bets on higher interest rates.
US Federal Budget deficit up by 13% to US$96,3 bln against expected US$80 bln. Budget’s revenues up to US$166,5 bln (+1%). Budget’s expenses up to US$262,7 bln (+5%), which is a record high.
The market sentiment is bullish for the Euro. China continues selling off dollar reserves and in spite of Bernanke said that “it is not a significant riskâ€, Fed is obviously worried about this fact. Japan’s reserves are also at a steadfast eye. China’s reserves exceed $1.2 trillion, and Japan has more than $900 billion.
Euro kept positive mood ahead of Trichet speech on European session. If EU growth continues going up, this could press the ECB to raise rates further in order to avoid inflationary pressures. As supposed before, the European Central Bank kept borrowing costs unchanged at 3.75%.
The dollar also weakened on speculation minutes from a March Federal Reserve meeting and comments by central bankers that could signal the U.S. economy is falling into stagflation, a state where growth slows and prices rise.
FOMC minutes: US economy not as strong as expected two months ago. Consumption, employment strong. Business investment weak. U.S. prices higher than expected. Major European bourses saw higher levels on Friday. The Euro fell a little on profit-taking after the rate failed to break above $1.3550 and also fell slightly on profit-takings before the weekend. General trend on Eurodollar is up.
Direction of market movement in the following week will be defined by important data on US (CPI, Philadelphia Fed index, NY Empire State Index, industrial production, retail sales, housing starts, building permits, business inventories, leading indicators, EIA petroleum status report and EIA natural gas report).
Economic Situation in Russia looks much better compared to USA:
(1) Inflation falls and its forecast keeps unchanged (7,8% in 2007, 6-7% in 2008, 5,5-6,5% in 2009, and 5-6% in 2010);
(2) Russia’s federal budget surplus amounted to US$18,2 bln in Jan-Mar 2007. Budget’s revenues & expenses mostly correspond to planned targets;
(3) Russian stabilization Fund increased and reached US$108 bln;
(4) Russia gains from high oil prices. All mentioned strengthen Russian ruble.
Russian Stock Market
Source: RTS
MARKET PERFORMANCE: Market performed well last week. RTS Index rose by 1,91% and added $1,75 bln in capitalization. Index rose steadily from Monday to Wednesday, then declined on Thursday, then rallied up to all time highs on Friday and closed at psychological level above 2000 at 2001,59. SEP7 future opened a week above RTS showing anticipation of RTS’s upside guidance and fell slightly below it only on Friday. On Wednesday RTS caught up SEP7 and closed a week above it. JUN7 & SEP7 RTS futures closed below 1985 on Friday.
Last week all sectors performed good and closed positive. Best performers were Oil and gas sector (+2,36%) and Metals and extraction (+1,49%). RTS index rose 11,28% from the beginning of this year. MICEX and MICEX COMP indices closed a week with this year’s highs at 3505,23 and 1770,23 respectively.
FINANCIALS: OGK-6 (net profit at USD47m in 2006), UTair (net profit surged 45.5% USD621m in 2006 compared to a year earlier), VTB Group (net profit grew two-fold to $1.2bn in 2006 compared to a year earlier), OGK-5 (net profit amounted to USD21.97m in 2006), Norilsk Nickel (prel net profit under IRFS may reach $5bn), RTS Group (net profit surged 12,9 times to USD1.43m in 2006 compared to USD0.32m in 2005), VimpelCom (net profit stepped up 31.9% to $811.489m in 2006 compared to $615.131m a year earlier), Itera (net profit went up 1,7 times to USD76.8m in 2006).
ISSUES: Magnitogorsk Iron and Steel Works (MMK) places GDR on the London Stock Exchange (LSE). TGK-5 plans to make for an additional share issue. TGK-10 will place 3-year maturity certificated non-convertible coupon-bearing bonds worth USD115.7m. The shareholders of Sberbank will consider a stock split at an annual general meeting on June 29, 2007. The shareholders of Mosenergo have purchased 128,565,570 common shares, or nearly 1.12% of an additional issue, by exercising their preemptive right. X5 Retail Group N.V. to float additional common shares worth $1bn in 2007. TGK-5 may sell at least 20% of its additional share issue of 332bn shares to portfolio investors.
ACQUISITIONS & INTENTIONS: Gazprom intends to purchase additional issue of Mosenergo to receive a controlling stake. Gazprom eyeing stakes in generation companies including OGK-1 and OGK-4. RBC acquired a controlling stake in Loveplanet. Evraz Group intends to become a global by taking over of Canadian IPSCO.
OVERVIEW: Gazprom increases its gas supply to Greece, the company is currently covering 80% of the country’s natural gas demand. Analysts estimate that Mobile operators’ revenue would surge 84% to $700m by 2009. RUSAL considers India as a potential country for developing its business, considering a project with estimated cost of $1bn. RAO UES will complete talks on electricity supplies to Azerbaijan by May 2007. Evraz boosts steel output.
YUKOS: YUKOS creditors have approved an auction for the rest of the company’s large oil assets. It is scheduled for May 10, 2007. Rosneft is named as the most probable buyer. Experts have calculated final prices of the first two auction lots and offer prices for the rest of the lots, and have come up with a total of USD27.22bln worth of YUKOS assets. Rosneft may swap 1-2% of the newly acquired Yukos’s assets with China National Petroleum Corporation in return for access for the local oil market assets (oil refineries and filling stations).
Oil Prices
DJI: Market went down on Mon-Wed. Wall Street went down ahead of Bernanke and FOMC minutes. Stocks opened down on Wednesday and after some drifting started to climb up fast. Rally continued on Friday and DJI closed at 12611,5 thus showing readiness to go to Feb’s highs at 12700-12786. Week’s index growth is 0,34%. It was expected that NFP issued previous week can’t change market expectations on US economy that performs not good now. All economic indicators on US issued this week appeared weak and again put dollar under pressure.
US ECONOMIC INDICATORS PUBLISHED:
10 April.
EIA: “Total motor gasoline inventories fell by 5.5 million barrels last week. U.S. commercial crude oil inventories increased by 0.7 million barrels compared to the previous week. to 333.4 million barrels”.
11 April.
US Federal Budget deficit up by 13% to US$96,3 bln against expected US$80 bln.
ECB Liikenen: “European economy has been doing betterâ€. Germany Export Association: “German firms can cope with euro-dollar at $1.40â€. Fed’s Lacker: “is uncertain about how much inflation will moderate this yearâ€, “Inflation expectations also depend on energy pricesâ€. Dallas Fed Pres Fisher: “inflation is not as low as some would likeâ€,“US econ has been growing ‘handsomely’.†Mr. Trichet: “monitoring very closely†about growth and inflation.
12 April.
Import prices (Mar) +1.7%. vs. 0,7% in Feb.
Export prices (Mar) +0.7% vs. 0,2% in Feb.
Initial jobless claims +19k to 342k vs. 321k prev.
13 April.
US PPI Mar 1.0% vs. 1.3%
US Export Feb, bln $124.0b vs. $126.8b in Jan
US Import Feb, bln $182.4b vs. $185.7b in Jan
US: Feb trade deficit $58.4 bln down marginally from $58.9b in Jan.
ECB, Weber: “must very carefully monitor inflation risks. Oil prices are a risk to price stability. Sharp FX movements are undesirable.â€
WORLD INDICES: Last week only N255 was outsider with 2,14% decline. All other taken indices closed positive. CAC40, EN100 and FTSE100 closed at this year’s highs thus putting additional pressure on USD. EN100 keeps at its highs above 1000 (psychological level) for 9 days in a row.
This Week’s Agenda.
April 16:
• US: Retail Sales (Mar)
• US: Retail Sales ex-auto (Mar)
• US: NY Empire State Index (Apr)
• US: Net Foreign Purchases (Feb)
• US: Business Inventories (Feb)
April 17
• Uniastrum Bank to sell RUB 1.5 bio of domestic bonds with a 3-years maturity and a put option from par at the middle of 2-year.
• Financial Company NCh, asset manager of the Noviye Cheriomushki Group – leader in the market of rent of warehouse for storage of fruit-and-vegetable production, to sell RUB 1.0 bio of domestic bonds with a 4,5-years maturity and a put option from par at the middle of 2-year.
• US: CPI (Mar)
• US: Core CPI (Mar)
• US: Housing Starts (Mar)
• US: Building Permits (Mar)
• US: Industrial Production (Mar)
• US: Capacity Utilization (Mar)
• US: ICSC-UBS Store Sales
• US: State Street Investor Confidence Index
April 18
• US: MBA Purchase Applications
• US: EIA Petroleum Status Report
April 19
• Gross Plants Group of Companies, group’s company created to raise financing for Crystall Gross Group of Companies - one of the leading Russian producers of alcohol, to sell RUB 1.0 bio of domestic bonds with a 3-years maturity and a put option from par at the end of 1-year.
• Ufaoil-OPTAN, producer and seller of petroleum products in Russia and CIS countries, to sell RUB 1.5 bio of domestic bonds with a 3-years maturity and a put option from par at the end of 1-year.
• Zhilsotsipoteka-Finance, Company created raise financing for a non-profit organization “Fond Zhilsotsipoteka”, to sell RUB 1.5 bio of domestic bonds with a 3-years maturity and a put option from par at the end of 1-year.
• US: Jobless Claims 04/14
• US: Leading Indicators (Mar)
• US: Philadelphia Fed (Apr)
• US: EIA Natural Gas Report
April 20
• Russian Standard Bank to sell RUB 5 bio of domestic bonds with a 5-years maturity and a put option from par at the middle of the 2-year.
Sources: The Central Bank of Russia, Reuters, Cbonds, Ministry of Finance
RTS
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