Russian Markets Research June 4-10, 2007

Released economic data showed that Russian economy continues to grow. However the state’s inflation forecast now seems not as accurate as it was considered before.
One more negative week for the Russian stock market. RTS and MICEX indices fell by 2% in the average. RTS is trying to stop falling from its life-time high.
European Central Bank hiked its key rate by 25bps to 4.00% as it was expected. Bank of England kept its repo rate on hold at 5.50%.
DOW exceeded expectations of all analysts and demonstrated its best for the last month by renewing its lifetime high several times. Last week DOW fell by more than 400 points from 13.674 to 13.267. On Friday DOW touched 13.250 and immediately rallied up to 13.431 and closed the week at 13.420.
Oil prices remained at high levels but showed mixed results last week. Brent and Urals rose by 1,52% and 4,02% respectively, WTI fell by 0,48% last week.

Russian Economic Update

Russia’s inflation stood at 0.6% in May 2007
Russia’s inflation stood at 0.6% in May 2007, which is 1.2% lower than in the same month a year earlier. Officials pointed out that these figures gave reasons to hope that inflation would not exceed 8% in 2007. Russia’s inflation stood at 4.7% in January-May 2007 compared to 5.9% for the same period a year earlier. Core inflation amounted to 2.5% in the first five months of 2007 and 0.3% in May 2007. In five Russian regions consumer price growth was 1%, with the highest showing of 2.1% in Kalmykia. In Moscow and St. Petersburg, inflation stood at 0.8% and 0.9% (5.6% and 5.7% for the year-to-date), respectively.
Officials changed their forecast up to foreign capital inflow
According to the Russian Finance Minister Alexei Kudrin, the net foreign capital inflow to Russia will exceed $70lbn in 2007. According to earlier forecasts, foreign capital inflow in Russia was projected to be around $30bln in 2007. Meanwhile, it stood at $41.6bln in 2006.
Real ruble’s appreciation slowed
According to the CBR, the real effective ruble exchange rate grew by 2.35% in the first 5 months of 2007. In the same period of 2006 the real effective ruble exchange rate grew by 5,4%. In May, the ruble strengthened only slightly. In the CBR’s opinion, it is quite likely that the real ruble’s appreciation will not exceed 4-5% by the year-end.
Putin said for longer presidential term
Russian President Vladimir Putin declared that the presidential term in Russia could be extended to between five and seven years. According to Putin, for Russia, four years is quite a short term, of course, and six or seven years would be quite appropriate. At the same time, he supports the Constitutional regulation that no one person shall hold the office of the President for more than two consecutive terms.
Russia’s domestic debt went up by 11.64% to $44.46bln as of June 1, 2007
According to the Russian Finance Ministry, Russia’s domestic debt went up by 11.64% to $44.46bln as of June 1, 2007 compared to $39.81bln as of January 1, 2007.
The Bank of Russia may soon cut back its discount rate
According to the CBR’s Chairman Sergei Ignatyev, the CBR may soon cut back its discount rate, because the current rate of inflation allowed for revising the discount rate lower. According to the central banker, the discount rate is traditionally 1-2% above inflation. The discount rate currently stands at 10.5% in Russia, while year-to-date inflation as of the end of May stood at 4,7%.
Oil of Rebco brand will be traded in Russia
It is planned that trading of oil of Rebco brand will be transferred to newly created crude exchange in St.Petersburg from US NYMEX by the end of this year. Futures to Rebco will be also traded in Russia.
Net supply of foreign currency from population amounted to the record of $1,3bln in April
Net supply of foreign currency from population amounted to the record of $1,3bln in April. The demand of population for cash Euro rised by 14% in April, for USD stayed flat. Supply of USD and Euro increassed by 15% and 5% in April respectively. As a result USD and Euro amounted to 84% and 15% in total foreign exchange supply from population.
Business confidence index in services sector fell to 56,4 in May from 57,4 in April
Business confidence index in services sector fell to 56,4 in May (which is the minimum level from 2001 when this index started to be calculated) from 57,4 in April. In general, the index showing above 50 means an increase in business activity, growth of optimism and new orders.

The average wage amounted to $459,7 in January-April 2007
According to CBR, the average wage amounted to $459,7 in January-April 2007. The World Bank forecasts that the average wage will exceed $500 in 2007. Almost in all sectors of the economy the growth rate of wages exceeded 15%. The highest growth rate was in the state’s sector, trade and building sectors. A glance to the past: 2003 - $179,4, 2004 - $237,2, 2005 -$301,6, 2006- $394,7.
Russia will increase the output of bird meat by 16% in 2007 2
Russia will increase the output of bird meat by 16% in 2007 to 1,8mln tonne. Thus Russia will for the first time cross output level of 1990, which is considered to be the key level.

STATE GOVERNMENT
Draft guidelines for Russia’s unified state monetary policy for 2008 were approved
The Russian State Duma banking committee has approved draft guidelines for Russia’s unified state monetary policy for 2008 (prepared by the CBR). The policy’s top priority for 2008 is to decrease inflation to 6-7%. Russia’s gold and currency reserves are expected to grow at a slower rate, while foreign capital inflow is projected to increase significantly.
Russia reported lower federal budget surplus
According to verified data of the Russian Fedral State Statistics Service, Russia’s federal budget surplus slid by 17.3% to USD18.39bln in January-March 2007 compared to the same period a year earlier.
Budget revenue stood at USD54.90bln, or 1.6% higher than in Q1 2006. Budget spending was USD31.78bln, or 14.86% more than in Q1 2006. In January-March 2007 the Federal Tax Service transferred USD36.65bln to the federal budget, or 10.6% less than in the first three months of 2006.
Russia’s consolidated budget surplus widened 8.4% in Q1 2007
According to Rosstat, Russia’s consolidated budget surplus widened 8.4% to USD29.95bln in Q1 2007 from USD27.62bln in the same period a year earlier. Consolidated budget revenue stood at USD97.69bln, a 27.2% more than in the same quarter in 2006. Spending amounted to USD67.75bln, which is 37% more than in the same quarter in 2006.
Russian small IT businesses will to grow and the number of trade companies will fall by 2020
According to Russian Economy Minister German Gref , the number of small-size businesses in Russia, working in the IT sphere will increase five-fold by 2020. Furthermore, it is estimated that the number of trade companies will reduce in 2020.
Bank of Russia reported higher assets
According to the bank’s balance data, as of May 1, 2007 the assets of the Bank of Russia stood at around USD392.53bln, up 49.59% from a year earlier. Loans and deposits totaled USD274.69mln, while securities were worth USD10.85bln.
PM disappointed about small businesses
Prime Minister Mikhail Fradkov criticized the situation in the Russian small business sector. According to him small business is under excessive pressure from controlling agencies, inspections and in some cases interests of businessmen are hurt, and unfounded claims are made, preparing ground for abuse and corruption. The premier urged responsible government departments to offer specific measures aimed at providing conditions for fair competition, as quickly as possible.
The situation with small business is the best in Moscow. Russia’s small business potential is concentrated in the city. Over 2 million people are employed in Moscow’s 230,000 small- and mid-sized businesses.
CBR continues to deprive licences from banks
The CBR deprived licences from two banks: “Obshiy” and “MordovSozBank”, which were registered in Moscow due to their multiple violations of anti-money-laundry law.

INTERNATIONAL COOPERATION

Ukraine cut oil purchases from Russia
Ukraine’s refineries decreased purchases of Russian oil by 7.1% to 4.513m tonnes in January-May 2007. Meanwhile, purchases of the republic’s oil edged up 3.5% to 5.696m in the first five months of 2007.
Ukraine will cut electricity supplies to Russia in June
Exports of Ukrainian electricity to Russia and Belarus will be low in June 2007, as Ukraine does not have any electricity surplus.
Russia is currently looking into the possibility of extending a loan to Belarus
According to Russian Finance Minister Alexei Kudrin, Russia is currently looking into the possibility of extending a loan to Belarus, Belarus announced that it was hoping to take out two loans worth $1bln and $500mln in 2007 and 2008, respectively.
Russia abandoned all supplies of rice from India from May 1, 2007
Russia abandoned all supplies of rice from India from May 1 2007 because of dangerous components for health of people were found in recent supplies from India.

WORLD ECONOMY

July futures to wheat grew by 4%
July futures to wheat grew by 4% on Chicago Board of Trade due to expectations of low crops of wheat in USA, Russia and Ukraine.
OPEC does not plan to increase the supply of oil
OPEC does not plan to increase the supply of oil. If prices will continue to rise then the correction of supplies will be done, but for today OPEC needs to do nothing. According to OPEC the rise of oil prices is due to geopolitical factors and not due to low supply to the market.
De Beers waits for supply increase for diamonds
De Beers, the world’s largest producer of diamonds, waits for supply increase for diamonds due to the general increase of the growth rate of the world’s economy. The company wants to use this and will increase its own supplies to the world’s market by starting new extraction facilities. ALROSA, which extracts 97% of Russia’s diamonds and 22% of world’s diamonds will decrease its supplies to De Beers and from 2009 supplies will be cancelled in full.

Russian Money Market

Last week O/N rate lay in the band of 2,90–3,00%, for one week rubles could be found at 3,10-4,40%, and for one month at 3,40-4,10%. O/N rate consolidated very close to 3% last week. As usual O/N rates fell to 2,0-2,25% by the end of trading sessions. At the end of the week we saw the level of liquidity where rates did not fall greater and even slightly rose when liquidity rose.
Liquidity again increased on the money market last week. There was a slight change in balances on C/A last week. Balances on C/A amounted to 456,20bln rubles at the end of the week. Bank deposits with the CBR increased from 1266,30bln rubles on Monday to 1286,70bln rubles on Friday.
The total flow of balance on C/A and deposit accounts with CBR increased by 0,42trln rubles last week compared to previous week. The average total liquidity balance per day increased to 1735bln rubles compared to 1650bln rubles in previous week. 3
The CBR does not hurry to sterilize excess liquidity on the market and the probable reason for this is expectations for considerable inflow of foreign capital.
Posted Russia’s money base data showed an increase above psychological level of 10.000bln rubles as of May 1, 2007. International credit market rates also increased last week by 0,8% in the average.

GOLD AND FOREIGN CURRENCY RESERVES:
The CBR reported that Russia’s gold and foreign currency reserves reached $403,6bln as of June 01, 2007, stepping up by $1,4bln or 0,35% from their previous level. Reserves have been climbing for FOURTEEN weeks straight, up $92,5bln or 29,73% within this period, pushed by large amount of dollars the CBR has been purchasing on the domestic currency market. The Economy Ministry’s forecast (rise by): $90-95bln in 2007, $48.3-71.3bln in 2008, $23.6-51.5bln in 2009, and $14.4-25.5bln in 2010. However, since January 1, 2007, the reserves have already expanded by $100,6bln or 33,2%.
US economy showed some positive signs. The dollar could be a bit stronger at the beginning of this summer. Treasuries market was on focus last week. Thursday was the worst day on world’s debt markets since the spring of 2004. Per one day yield of UST10 rose by 18bps from 4.97% to 5.15%. UST2 rised from 4.99% to 5.03%. But there were no serious reasons for such yield rise. There were some rumors on the market that it was caused by an increase in the interest rate by New Zealand, but this sounds strange since the country with GDP less several times than the volume of debt market (more than US$4) hardly could affect the market. We suppose that there were two true reasons. The first is sales from mortgage agencies which hedge their assets from rates rise. The volume of three largest mortgage agencies approximately equals the volume of Treasuries market. They balance the duration of assets and liabilities because they face gaps sometimes. When interest rates rise, the growth rate of early payments on debts decreases, and the duration of mortgage portfolios increases. In this case mortgage agencies sell Treasuries to compensate the growth of duration. But these sales do not have speculative background. Similar situation happened in summer 2003 and in spring 2004 when many primary brokers faced huge losses. US officials asked these agencies “to be more accurate” but everybody knows what happened last Thursday. This version is confirmed also by the fact that most affected were “long papers” which are traditionally used for hedging. The second reason, as we suppose is the breakout of an important level of 5.00%, which led to closing of many long UST positions worldwide. On Friday yield of UST10 was in the range of 5.10-5.25%. Emotions ruled the market. Emerging market suffered on Friday as well. Russian domestic bonds, when falling, sometimes lost liquidity in full with bids disappearing at all. All the activity was on Russia30. Growth rates of Russian corporate bond market and corporate Eurobond market increased considerably in May compared to April.

Russian FX Market

RUSSIA’s FX OUTLOOK

USD/RUR:
The pair was traded in the band of 25,80–25,99 and increased by 0,3% last week. Trade volume lay in a standard band of $2,2-4,4bln on the Russian currency market. The CBR decreases the liquidity on the money market by purchasing large amounts of USD on the Russian currency market for a long time already, which leads to the considerable increase of Russia’s gold and foreign currency reserves. Thus, a high trade volume is not surprising any more.

OUR GLOBAL FX STRATEGY
EUR/USD:
Major: US economy showed some positive signs. The dollar could be a bit stronger at the beginning of this summer.
Technical view: Bids $1.3415/25, offers $1,3465/75, stronger $1.3515/25.
Movement: Market was very volatile and the pair fell by 0,56% last week. On Monday and Tuesday the pair rose to the high at 1.3553. On Wednesday it fell to the strong support 1.3420 but was not able to keep above it and triggered stops below it on Friday, which resulted in the pair’s breakout to the low at 1.3220. But already on Friday some correction started and the pair closed the week at 1.3372. Fundamental reason for such considerable fall is some positive data on the US economy; technical reason is breaking lots of stops below 1.3400.
RATES: ECB hikes rate by 25bp, as expected, to 4.00%. Interest-rate futures suggest investors are betting the ECB will raise interest rates once more this year. Our forecast is for the hike by 0,25% this year and 0,25% more next year. The probability that Fed will cut rates at any time this year decreased since US officials wait for not only getting core inflation below 2%, but look for even 1,5%. Only a major setback in the markets or a big slowdown will let the Fed shift its bias or begin to cut rates. We shifted our forecast for Fed rate to flat till the end of this year.
The rate differential still continues to move in favor of the Euro. The market is rebuilding some long Euro positions.
FUNDAMENTALS: As we expected, US Q1 GDP was revised down from 1,3% to 0,6%. At the same time we boosted our US Q2 GDP estimate to +2.6% from +2.2%. The housing market is still dragging the US economy down. Rising gasoline prices can also hurt the US economy. The broad based upswing in non-manufacturing activity provides further evidence that GDP growth picked up significantly from the first quarter.
The US economy waits for new fundamentals. Any fresh weakness in the US data will be USD negative.
Bush’s Administration downgraded the forecast for US GDP growth for 2007 from 2,9% to 2,3%, due to the low US economy performance in Q1 2007. Earlier IMF decreased the forecast of US GDP for 2007 from 2,9% to 2,2%. The IMF also said the Euro zone economy is moving from “recovery” to “upswing,” with the fundamentals in place for solid growth. It projected euro area GDP growth of 2.5%.

Russian Stock Market
MARKET PERFORMANCE: RTS again fell last week by 2,15%. Index rised slightly on Tuesday but steadily decreased till the end of the week. Again almost all market sectors dropped together with RTS last week. Oil&Gas, Telecom, Metal&Mining, and Retail dropped by 2,56%, 2,27%, 2,53%, and 0,04% respectively. Industrial sector again surprised by gaining 3,17% when all other sectors fell. Last week futures on RTS tagged the index and dropped as well. JUN future closed the week at 1808,00 (-2,11%), SEP at 1829,85 (-2,14%). However, futures closed the week above the index which is a positive signal for RTS. MICEX and MICEX COMP indices closed the week at 3106,31 (declined by 2,29%) and 1587,66 (declined by 1,99%) respectively. Last week oil prices showed mixed results: Brent and Urals rised by 1,52% and 4,02% respectively last week, WTI fell by 0,48%. Stock prices of Russian oil companies rallied down again, which is something quite strange. 8
FINANCIALS: OGK-1 (net profit USD224mln in 2006 compared to USD2.21mln a year earlier), TGK-2 (net profit surged by 42% to USD14mln in Q1 2007 compared to the same period a year earlier), Multiregional TransitTelecom (MTT) (net profit grew by 56% to $86mln in 2006 compared to the year before), Gazprom Neft (net profit surged by 30.5% to $3.66bln in 2006), Wimm-Bill-Dann (net profit soared by 84.8% to $32.1mln in Q1 2007), Rosneft (net profit fell by 15% to $3.53bln in 2006), VolgaTelecom (net profit dropped by 14.8% in 2006 to USD82.44mln compared to 2005), Aeroflot - Russian Airlines (net profit climbed by 36% to $258.1mln in 2006 compared to a year earlier), GAZ Group (net profit soared by 94% to USD232mln in 2006 compared to a year earlier), MDM-Bank (net profit climbed almost two-fold to USD54mln in Q1 2007 compared to the same period a year earlier), TNK-BP (net profit surged by 40% to $6.629bn in 2006 compared to a year earlier), Polyus Gold (net profit went up 10.3 times to $1.157bln in 2006 compared to $112mln a year earlier), Inter RAO UES (net profit soared by 76% and exceeded USD65.79mln in 2006 compared to a year earlier), VSMPO-Avisma (net profit surged by 48.4% to $74.61mln in 2006 compared to a year earlier), Norilsk Nickel (net profit climbed 2.5 times to $5.965bln in 2006 compared to a year earlier).
ISSUES, ACQUISITIONS & INTENTIONS: TransCreditBank plans to float shares by 2010. VTB 24 plans to make an additional issue boosting the Bank’s share capital by USD675mln. The bank will issue 17,459,357 additional shares with a face value of RUR1,000 (approx. USD39). Shares will be floated by private subscription in favor of VTB and VB-Service. VTB and VB-Service will purchase 99.14% and 0.86% of the additional share issue, respectively.
DEALS: Rostelecom and Deutsche Telekom signed a memorandum on strategic cooperation on developing existing voice traffic and data transmission services. Norilsk Nickel has received approval of its proposed purchase of a controlling stake in LionOre Mining International Ltd. from Australia’s Federal Treasury. Gazprom Neft and Norwegian oil and gas company Statoil signed an agreement on cooperation in exploration and oil production projects in Russia and abroad.

US Stock market, Oil Prices, World’s Indices

DOW:
DOW exceeded expectations of all analysts and demonstrated its best for the last month by renewing its lifetime high several times. DOW’s lifetime high was registered on June 2007 at 13.692. On Tuesday, Wednesday and Thursday DOW fell by more than 400 points from 13.674 to 13.267. On Friday DOW touched 13.250 and immediately rallied up to 13.431 and closed the week at 13.420. Again something interesting happened with the correlation of DOW movement and USD on international foreign exchange market. DOW fell considerably on Thursday but USD strengthened. On Friday correlation turned to the right direction: USD again strengthened and DOW rised by 150 points. Let’s wait for some new data on US economy, especially treasury budget and US TIC, which can give us some data on foreign purchases of US securities.
US ECONOMIC DATA PUBLISHED:
Factory orders April 0.3% vs. 2,8% March.
ISM services index May 59.7 vs. 56 April.
Unit labour cost (Q1) revised 1.8% vs. 0.6%.
Productivity (Q1) revised 1.0% vs. 1.7%.
Jobless claims (week to 02.06) 309k vs. 310k.
Wholesale inventories April 0,3% vs. 0,4(0,3)%.
Consumer credit April +2,6bln vs. +14,0(+13,5)bln.
Import April 188.0bln vs. 190.1bln March.
Export April 129,5bln vs. 126,2bln March.
International trade April -58.5bln vs. -63.9 March.
HIGHLIGHTS FROM LAST WEEK’S SPEECHES:
FED’s Bernanke: Hiked rate due to upside price risks. Housing weakness has not spilled into other sectors of the economy. Inflation remains elevated and should gradually weaken. US econ should advance at a moderate pace. Long-term interest rates are relatively low. A quicker Yuan rise is in China’s interest. The housing market is likely to drag on the economy more than has been expected.
ECB, Trichet: (1) Macro/financial environment of EMU is robust, (2) Favorable economic outlook in EMU, (3) The main target is to keep financial stability, (4) Short-term profile of inflation is still determined by energy price.
ECB’s Weber: Monetary and economic analysis show upside price stability risks.
ECB MERSCH: Sees 2008 and 2009 eurozone growth at around 2.5%.
OIL PRICES:
WTI crude oil contract was traded at 7-day highs above $65.30 on back of comments from Iran’s President Mahmoud Ahmadinejad.
US EIA oil data for June 1 week: U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) inched higher by 0.1 million barrels to 342.3 million barrels. Thus we see some consecutive rises in inventories by 1-2mln barrels every time. 10
OPEC: OPEC does not plan to increase the supply of oil. If prices will continue to rise then the correction of supplies will be done, but for today OPEC needs to do nothing. According to OPEC the rise of oil prices is due to geopolitical factors and not due to low supply to the market. It is necessary to remember that OPEC reduced supplies to 2-year lows, which puts additional pressure on oil prices.
PRICES: Brent and Urals rised by 1,52% and 4,02% respectively last week, WTI fell by 0,48%.
WORLD INDICES
Last week all main world’s indices rushed down. Losers of the week were European indices DAX (-4,97%), CAC40 (-4,62%), EuroNext100 (-4,02%), and SWISS MI (-3,99%).

This Week’s Agenda

June 12
USA: ICSC-UBS Store Sales
USA: Redbook
USA: Treasury Budget May
June 13
USA: MBA Purchase Applications
USA: Import and Export Prices May
USA: Retail Sales May
USA: Business Inventories April
USA: EIA Petroleum Status Report 06/08
USA: Beige Book
June 14
USA: Jobless Claims 06/09
USA: PPI May
USA: EIA Natural Gas Report 06/08
ISSUES: FGUP PO UOMZ, engineering company, to sell RUB 1 bio of domestic bonds with a 3-years maturity and a put option from par in the middle of the 2nd year.
ISSUES: Kurganmashzavod-Finance to sell RUB 2 bio of domestic bonds with a 3-years maturity and a put option from par at the end of the 1-year.
ISSUES: IzhAuto to sell RUB 2 bio of domestic bonds with a 4-years maturity and a put option from par in the middle of the 2nd year.
ISSUES: EUROCOMMERCE to sell RUB 3 bio of domestic bonds with a 3-years maturity and a put option from par at the end of the 1-year.
June 14
RUSSIA: Gold and forex reserves USD
USA: CPI May
USA: Current Account Q1
USA: NY Empire State Mfg Survey June
USA: Treasury International Capital April
USA: Industrial Production May
USA: Mich Sentiment-Prel. June
ISSUES: Incom Lada to sell RUB 2 bio of domestic bonds with a 4-years maturity and a put option from par at the end of the 2-year.
ISSUES: Moscow Region Mortgage Agency to sell RUB 5 bio of domestic bonds with a 7-years maturity.

Sources:
The Central Bank of Russia, Reuters, Cbonds, Ministry of Finance

Related posts:

1. Russian Markets Research June 18-24, 2007
2. Russian Markets Research September 3-9, 2007
3. Russian Markets Research June 11-17, 2007
4. Russian Markets Research. June, 2007 in Brief

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