Инг Банк Евразия

FX and money market Continued dollar weakening against the Eurozone currency has weighed on local dollar value as well. The EUR/USD climb to 1.284 pushed the USD/RBL to 26.73 on Wednesday morning. In the meantime, EUR/USD appeared rather volatile on Tuesday, which was fully reflected in local FX market moves. After weaker-than-expected US consumer confidence, the EUR/USD surprisingly fell from 1.281 to 1.276, which was followed by a sharp recovery to 1.283 after the dovish tone of minutes for the last FOMC meeting. On the whole, we expect further RBL strengthening against the USD as a result of a continued EUR/USD rise. However, US data flow looks set to contribute to FX volatility with 2Q GDP scheduled for release today. The money market rates with tenor up to one week continue to float below 3% on the back of gradually growing banking sector liquidity. The sum of banks'' accounts and deposits with the central bank is RBL555bn, up RBL23bn from Tuesday. We do not expect any risk of a rate increase in the coming days. Stanislav Ponomarenko, Moscow (7 495) 755 5480 Rouble bond market Tuesday was stronger than Monday in the rouble debt market, but prices moved without any clear tendency. Internal factors such as cheap rouble funding (overnight interest rates stood at 1.5-2.0%) despite end-of-month effects continued to be favour rouble debt. At the same time, external markets showed some uncertainty ahead of US minutes from the Federal Reserve''s latest meeting. Yesterday, during the day, Russia ''30 descended, widening its spread over US10Y to 114bp, while US10Y got a boost after the less hawkish minutes than some had expected. As a result, the US10Y yield dropped to 4.78%. This morning, however, Russia ''30 followed US10Y rise, shrinking its spread back to 110bp. Today, market players will closely watch US 2Q GDP figures and we do not rule out some volatility in the external markets. Today, local markets are likely to remain around current levels taking into account movements in Eurobonds. Olga Golub, Moscow (7 495) 755 51 76 Glavmosstroy-2: opportunity for spread tightening After successful placement of Stolichnie Gastronomy (real estate operator affiliated with grocery retailer Sedmoy Continent), we see the opportunity to reassess the risks of the companies involved in the rapidly developing real estate and construction industry. We see the most upside for spread tightening for Glavmosstroy''s bonds, which is the leader of the Moscow construction market. The key supportive factor for Glavmosstroy''s credit quality is its strong shareholder. In 2005 one of Russia''s largest industrial and financial holdings, Bazoviy Elemnt, acquired a controlling stake in Glavmosstroy. Currently Glavmosstroy is consolidating into the construction holding, which plans to introduce IFRS reporting and conduct an IPO in the coming years. Meanwhile, Glavmosstroy has access to substantial funding resources, evidenced by the USD300m loan from Sberbank in February. Among two bonds of Glavmosstroy, the more liquid is Glavmosstroy-2 (RBL4bn issue with maturity in 2011 and put option in 2007). Currently the yield to one-year put of Glavmosstroy-2 is 10.4% compared to 8.78% for the two-year put of Stolichnie Gastronomy. Such a wide spread between the papers is unjustified, in our view. We estimate potential for spread tightening of at least 40bp. Stanislav Ponomarenko, Moscow (7 495) 755 5480 City of Moscow: 2007 budget draft City of Moscow set a 2007 budget deficit of RBL105bn (15% of budget revenues), although actual fiscal performance is likely to be much stronger Yesterday, the City of Moscow''s government approved the 2007 budget draft with a record budget deficit of RBL105bn, which is 15% of planned revenues of RBL700bn. 15% is a crucial threshold as, for example, regions may borrow abroad only if their budget deficit stays below 15% of revenues. Nevertheless, next year, City of Moscow does not plan to issue any Eurobonds as according to law this is only possible for redemption of previous foreign debt, which is not scheduled for City of Moscow in 2007. In 2007, City of Moscow will increase its expenditure appetite to make the budget socially oriented, which is typical for election year. Currently, Moscow plans to finance the budget deficit by new rouble bond issuance of RBL77.5bn (net issues - RBL64.3bn), which would push Moscow debt volume to RBL157.6bn (USD6bn). We believe that actual fiscal performance in 2007 is likely to be more positive and Moscow''s government will enjoy additional budget revenues, turning the situation towards a budget surplus. Indeed, in 2006, Moscow had also planned a budget deficit of RBL56.6bn and wanted to aggressively borrow in the local debt market. However, actual borrowing volume amounted to 30% of the initially plan, which is not surprising as in January-August City of Moscow''s budget surplus reached RBL100bn. Investment implications: The relatively high budget deficit for 2007 is not alarming as actual fiscal performance is likely to remain impressive. We expect a budget surplus in 2007 and serious cuts in a borrowing programme in the local market, although potentially the City of Moscow might easily place a significant volume of new debt (RBL100-120bn) in 2007. Julia Tsepliaeva, Moscow (7 495) 755 5489 Alrosa The federal government is seriously aiming to take a diamond monopoly under its control The federal government intensified its efforts to take Alrosa, the second-biggest diamond company in the world, under its control. At the beginning of the year, the company was not public with 37% of its shares in federal government property, 32% belonging to regional authorities and 8% to municipal authorities. The other 23% is dispersed among minor shareholders. The idea to increase the federal share in the company to a controlling stake is not new - the issue has been discussed since the mid-1990. In 2001, President Putin targeted returning the monopoly to federal control while regional Yakut authorities have successfully used all opportunities to protect their 40% stake. However, the federal government had already managed to increase its share to 47% by 2H06 and is now aiming to expand it to 50% + 1 share. The federal government is looking to be very serious. Yesterday, it submitted the amendments to the budget code to the Duma, which will be approved in September-October 2006. The proposed amendments are re-distributing Mineral Resource Tax on diamonds from federal to regional budget. As a result, the regional Yakut budget will get an additional RBL2.6bn. The federal and regional sides have also agreed on a further compensation package as the Yakut budget may lose some more RBL9-11bn. This makes the project to take the company under federal control already in 2006 realistic. The deal itself could be positive for Russia in general: * It is unlikely result in a further increase of government control over economic activity as in this case we should see asset redistribution from regional to federal government. This is not bad for transparency of the monopoly and thus for management efficiency. * It should accelerate the IPO process. * If/when the company becomes public, it should be positive for the market, and federal government investments. * Previously, President Putin has discounted reports of a potential deal between Norilsk Nickel and Alrosa. However, we cannot rule out that the issue will be raised later, in our view. Investment implications: We believe the federal government may complete the deal on Alrosa in 2006. As has been expected, the deal represents a compromise between regional and federal authorities. The deal should be positive for the market (it would bring a new stock there) and for Russia in general. The event should help to further curb the political power of regional authorities. Julia Tsepliaeva, Moscow (7 495) 755 5489 <<06.08.30.pdf>>

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