Friday, June 30, 2006

Russian economy would collapse without corruption - expert

The Russian economy would collapse if corruption was to disappear today. Such is the strength of the system of corruption in the country which occupies the 126th place in the Transparency International index.

The transition to a legal economic system would require far too many resources and sacrifices to be taken. Not only it would take years for the country to progress towards a transparency, but support from business and the general public is vital.

Another issue which dogs any investor is insider trading. Whilst corruption scares foreign investors away, insider dealing negatively impacts the stock market. Although progress seemed to be made with the introduction of the Insider Dealing Legislation, the truth is that the new law is fundamentally flawed. Previously, any high-ranking official could have been under investigation, but now the legislation is only applicable to private companies. This means that Central Bank and the ministries have to regulate themselves while state officials are excluded from the list of potential suspects.

Since state officials are the likely recipients of unpublished price-sensitive information, their competitive advantage on the stock market will only increase. Not only is the state the biggest holder of Russian securities but its funds account for over 30 percent of the total 2005 Russian M&A. Corporate control of the ruling political system will become more apparent with the upcoming IPOs of Rosneft and VneshTorgBank. This potentially suggests that the level of insider trading will only increase in the future and, just like corruption, it will become a Russian institution.


Thursday, June 29, 2006

Tatneft leaves NYSE

Russian oil company Tatneft has announced its intention to delist from the New York Stock Exchange (NYSE). It will be the first time a Russian company has left the world's biggest exchange. Tatneft said its decision was based on the growing cost of securities registration in the United States and a desire to focus on trading on the London Stock Exchange (LSE), where it is also listed.

But market players say the company failed to comply with the NYSE's requirements.

A source in Tatneft's Moscow office said the company currently had 21% of its stock listed on the NYSE in the form of American Depositary Receipts (ADR), all of which could be moved to the LSE. The delisting decision is to be considered by Tatneft's board of directors on June 30.

"Since spending on registration with the U.S. Securities and Exchange Commission has grown substantially in the past few years, the company has decided to move international trading in its securities to London," Tatneft said in a press release.

Other market players say these reasons are not crucial.

"The company most likely does not want to provide transparent financial reports," said Konstantin Batunin, an analyst with Alfa Bank. "The LSE requirements on issuers are less strict, and the disclosure volume is smaller."

Vladislav Metnev, an analyst with the Troika Dialog brokerage, agreed.

"One of the reasons is delays with the provision of reports, which proves that Tatneft does not need the NYSE listing," he said. "It may reduce its disclosure standards after delisting from the exchange."

Tatneft has had disclosure problems for years. Its press release said the company had sent the SEC an audited report for 2004 and an unaudited report for the first half of 2005. Had the company postponed the reports, it would have lost its listing on the NYSE anyway.

Kommersant, RIAN

Tuesday, June 27, 2006

State prohibits cross-border M&A

Contrary to the popular belief in Russia, it is not Europe that is not letting Russian companies into the Western market, but rather it is the state which gives out far too few approvals to cross-border mergers and acquisitions.

As the Vedomosti editorial continues, Mr. Mordashov was one of the lucky ones to get a chance of entering the European market. Since no deal is a sure deal, a failure was a possibility but with the lack of other possible mergers between Russian and foreign companies, each deal that falls through is felt painfully in the country.

Russia is falling behind in foreign M&A. Only 23 percent of all merger and acquisition activity goes to those that involve foreign companies. This compares with the Eastern Europe’s 40 percent Slovakia’s 60 percent and Ukraine’s 95 percent. The small amount of cross-border activity is due to the fact that the government does not allow it, something which incongruent with Russia’s desire to enter the WTO.


Monday, June 26, 2006

The fallout from the Arcelor-Mittal merger

[Update 2]

An agreement has been reached between Mittal Steel and Arcelor to form Arcelor Mittal, the world’s biggest steel company. Although there has not been a response from Severstal or Mr. Mordashov yet, others reacted with anger.

Viktor Khristenko, Russian's energy minister, has accused Europe of ‘russophobia’, as it tries to block the global ambitions of the strengthening Russian economy.

Others believe that Severstal was used as nothing more than a bargaining chip to get Mittal to up the stakes in the battle to merge and to push up Arcelor’s capitalisation.

Although, some analysts affirm that Mr. Mordashov is not going to be too downbeat on the failure to push the proposed merger through. According to a Prospect analyst, Mr. Mordashov could be looking at Corus as the next likely candidate for a merger proposal.

The perceived damage to Russia’s reputation (after all the Severstal-Arcelor deal was personally approved by the president) could be repaired by Roman Abramovich. The Chelsea owner could have been possibly given an order to create another steel empire. The new union of steel companies could include Evraz (41 percent belongs to Mr. Abramovich), Severstal and possibly Corus. Then, Roman Abramovich would try to sell the resulting company to Arcelor-Mittal for an undisclosed stake in the newly formed company, thus repeating the Kremlin-endorsed strategy.

Another source points to the possibility of Abramovich financing Severstal’s improved bid for Arcelor.

What is clear is that the steel market could change radically in the near future. In fact, as the author of a letter to the FT rightly suggested, the newly merged company should be called M&A Steel.

Gazeta, Vedomosti, RusEcon and other sources.

Thursday, June 22, 2006

Turkmen gas price hike might force changes

[For John especially]

Continuing this week’s analysis of the gas sector, most of the non-governmental media in Russia is discussing the relationship between the exporter (Turkmenistan) and the unlikely importer (Russia) as the Central Asian nation is demanding that Gazprom must start paying higher prices for its gas. Many, especially in Europe, see Russia solely as an exporter of gas, without realizing that it desperately needs to import gas of its own in order to fulfill all of its obligations on the domestic and foreign markets.

Fundamental issues

Why does Gazprom give priority to the export market? As it has been discussed before, this is due to the fact that Europe is paying five times more than the domestic consumers (around USD250 per thousand cubic meters). In fact, the so-called “market price” could be defined the “the price Germans pay”.

Opaque state-owned companies seem to care more about their profit than about the needs of the people. As the monopoly and its controlling shareholder, the government, concentrates on acquiring European companies and resources in order to generate more capital, domestic customers’ fate seems irrelevant, which is dangerous as Russians could be considered as being mostly at risk if an energy crisis is to occur in the future.

This unhealthy situation, centering around the wide discrepancy between export and domestic, is made worse by the fact that there is no easy solution to it. If we are to bring domestic prices in line with “German prices”, then inflation will spiral and is unknown what effect this will have on the stability of the political system. Any other solution will requires political pressure, something which is unlikely to come in this time when political apathy and lethargy has gotten hold of the population. Decreasing consumption (energy-saving is virtually unheard of in Russia) is a difficult process of educating the public and let’s face it: it will not give results in the next few years.

Russia might be producing an image of an energy-super power who can bully its neighbors into submission but the truth is that it can be bullied by its own suppliers in the exactly same way. Let’s assume for a minute that Turkmenistan does turn off its gas at the source. This will not only cause widespread mass-media inspired panic in Western Europe, but will also put the Russian, Ukrainian or Georgian consumer in danger of spending the winter fighting gas shortages.

And Russia can’t do anything about it. Turkmenistan will not respond to any king of political pressure, it has no wine or mineral water to ban, no visas to reject and it does not depend on Russia for its energy supply. Hence it holds all the cards.

Blessing in disguise?

So Turkmen’s government has decided to double the prices it charges. After all, Turkmenistan is mimicking Russia exactly, by raising prices and warning it that it might turn the gas off or switch its supply to China. In the future, we might see Russia importing gas at “market prices”.

The first victim of this price hike will be Ukraine. Currently buying Turkmen gas (together with the more expensive Russian gas) from the shady RosUkrEnergo outfit,

Ukraine will see its import prices increase, something which will undoubtedly put pressure on the economy. Vedomosti analyst even goes as far as affirming that USD250 per thousand cubic meters will collapse the Ukrainian economy completely and that could be a secret ploy to remove Yulia Tymoshenko from the ruling post. Something to consider then.

The Turkmen gas price hike might be a blessing in disguise. Of course Turkmen gas is less vital to the Russian economy than Russian gas is to the Ukraine economy but it is important nonetheless. Gazprom is promising to increase its exports, something which produces shortages on the domestic market (which the Turkmen gas covers). Liberalisation might be a distant dream, but with the difference between export and import prices getting smaller, Gazprom will loose the desire to import foreign, politically unstable, gas and will put more of an effort into increasing its own supply, something which might benefit the economy as a whole. Also, the one-price system could see the disappearance of third party companies related to Gazprom which give it a bad image of an opaque state corporation where corruption is rife.

Hope for the future

Gas economics is creating Russia enemies all around. At this moment, the only friendly consumer getting cheap gas is the Russian citizen. Looking back, it could be argued that not before long the Russian consumer could theoretically become disgruntled with the energy politics of the state. Keeping the media under control might help. It is not unfeasible that the West will get blamed for the gas shortages with accusations of protectionism coming from Kremlin.

So far the market economy in the energy sector is giving way to centrally planned mechanism of a vertical political system. Whether the difficult times brought on by suppliers ‘not playing ball’ will pressure the system into changes is debatable. What is clear is that it will get worse before it gets better.

Vedomosti, RusEcon, Gazeta, BBC News and other sources.

Wednesday, June 21, 2006

Ford stripped of customs breaks

Russian authorities have for the first time become involved in a serious conflict with a foreign car manufacturer assembling its vehicles in the country. Customs officials have accused the Ford plant in Vsevolozhsk, Leningrad Region, of breaching an investment agreement, and have stripped it of tax breaks on imported car parts. This is a signal to all western auto companies starting production in Russia: even the slightest omission in the observance of the rules will be strictly penalized.

The plant, Ford Motor Company, produces 60,000 cars a year, operating under the Import to Free Customs Warehouse regime. The 1991 investment agreement stipulated that Ford was to increase domestic component production to 40% in 2006 and 50% in 2007. In August, the company is planning to sign a new agreement with the Economic Development and Trade Ministry, to obtain industrial assembly status, together with other obligations.

Sources say the company has disputes with the Russian ministry every year on how to estimate the percentage of local production, which, according to the Customs Warehouse regime, is calculated with an eye to the real costs of production. As a result, the total includes the wage bill for employees, and outlays on energy and land lease.

Toyota, Nissan, General Motors and Volkswagen have already announced their desire to build assembly units in Russia, and the issue of local manufacture is among the most contentious for them. The authorities on Monday made it clear they would not give foreign companies an easy time.

"The norms and commitments listed in agreements with foreign investors must be strictly fulfilled," the Industry and Energy Ministry said on Monday, commenting on the situation. "Any respected automotive company must honour its obligations," echoed Maxim Sokolov, chairman of the St. Petersburg committee on investments and strategic projects.

Kommersant, RIAN

Liberalisation of the gas market needed

RAO UES of Russia, the country biggest buyer of gas, is currently experiencing gas shortages. In order to combat this, the government is proposing price hikes, but true liberalisation of the gas market is needed is the country is to avoid huge energy shortfalls in the future.

RAO UES controls a third of the domestic gas market, which translates to 150 billion cubic meters of gas annually (total production is 640.6 billion, total export – 151 billion and rising). Two thirds of the gas it buys comes from Gazprom itself (through a daughter-company named MezhRegionGas), while the other more expensive third comes from “independent” producers, which are usually not only controlled by Gazprom itself but are a gateway to money laundering and corruption.

The gas shortages are due to the fact that Gazprom, the nation’s source of gas, cannot deliver any more gas because it is saving for the winter by transferring gas into the reserves. Additionally, as many analysts have many times pointed out, Gazprom will experience gas deficit by 2010. As the nation’s demand increases, Gazprom is simply unable to keep up.

The domestic market will see prices of USD100 per thousand cubic meters of gas, but this will do little to solve the underlying problem. If the situation stays unresolved, gas shortages have the potential of hurting the nation and taking away as much 5 percent of the annual GDP. A full liberalisation of the gas market is needed, which would allow independent companies to stake their claim on the domestic pipe-politics.

Support us and you will pay less?

Currently, most of Gazprom’s profit is from export to foreign countries, where the prices paid are higher. The monopoly has already planned for gas increases for Russia’s neighbors, and even those countries that are considered “friendly” will have to pay the price Western Europe is paying. There are suggestions that countries that happen to be in the Russian orbit might get better treatment, with Gazprom allegedly seeking ways to minimize damage to the economy from sudden price increases for countries such as Belarus. However, some are more cynical about the proposed price hikes with BrokerCreditService’s analyst believing that Russia will try to tempt other countries into maintaining pro-Russian stance in return for cheaper gas. It will be important to see how the price dispute with Belarus turns out.

Vedomosti, Gazeta, RusEcon

Monday, June 19, 2006

Russian tycoon ready to bargain for steel producer Arcelor

The head of Russian steel giant Severstal, Alexei Mordashov, will not back down on a merger with Arcelor; potentially, he is prepared to offer better terms than the company's rival, Mittal Steel. This is because top-level politics has become involved in the deal, so Mordashov already has no right to lose.

For Russia's top brass, the project is a matter of international prestige - the deal has been endorsed by President Vladimir Putin himself. If Severstal succeeds, Russia will be respected in Europe as a politically strong partner, one that saved Luxembourg-registered Arcelor from a takeover.

For the time being, Severstal has the upper hand in its battle against Mittal Steel. On June 11, Arcelor's board of directors unanimously turned down a Mittal Steel bid, and recommended that its shareholders vote for a merger with the Russian company at a meeting on June 30. However, some Arcelor shareholders are critical of the Severstal offer, mainly because it is less transparent. They say Mittal Steel's offer is more understandable, and the information it contains is more detailed and clearer.

Troika Dialog analyst Sergei Donskoi said both companies have room for maneuver. Mordashov may increase the size of his offer or reduce his stake in Arcelor, but Severstal is not financially as well-heeled as Mittal Steel.

"Mordashov will not gain from lowering his stake in Arcelor," said Finam analyst Natalia Kocheshkova. "On the contrary, he is anxious to increase it. Severstal must have a blocking stake at all costs, otherwise the deal has no purpose, because Mordashov would then swap greater control over Severstal for less control over Arcelor."

BrokerCreditService analyst Vyacheslav Zhabin said the deal with the Russian company has the support of the Arcelor management, who, if Severstal wins out, will keep their posts for four more years, as proposed by Severstal. "Arcelor managers will have to demand a higher offer from Mordashov to hold on to their positions. Otherwise they will be unable to explain to their shareholders why they should agree to the Severstal proposal, even though it offers less cash," the analyst said., RIAN

Related Article:

Arcelor's management should listen to its shareholders - The Economist

High oil prices key to stock market performance

Some predictions for the stock market performance in the case of USD100 priced Brent oil.

  • Aton analysts: RTS will exceed 2500 points. Gazprom could double its market capitalisation, SurgutNefteGas’s share price will rise by 84 percent and TNK-BP’s by 83 percent.
  • UBS: Gazprom will be 2.8 times more expensive, Lukoil – 3 times, TNK-BP – 2.6 times and SurgutNefteGas – 2.3 times.
  • BroketCreditService: TNK rising by 22 percent and SurgutNefteGas by 27 percent.

Oil priced as it is now, at USD70 per barrel.

  • UBS: Gazprom’s share price will increase by 93 percent, Lukoil by 124 percent, SurgutNefteGas’s by 75 percent and TNK-BP’s by 162 percent.
  • Troika Dialog: After 2008, Lukoil will be 3.5 times more expensive, TNK-BP – 3 times and SurgutNefteGas 2.5 times.
  • BroketCreditService: Lukoil will be 1.5 more expensive and TNK-BP will increase its market cap by 25 percent.

It remains to be seen if the oil price will increase. Some analysts believe that the oil price has peaked with USD50 being the likely price for the future. Others, most notably Goldman, believe that oil could go as high USD105 per barrel. Additionally, some investors go by such indicators as oil futures which seem to point to oil priced in the region of USD70 in the next few years. Does the investor’s outlook on oil prices dictate whether he or she should buy Russian blue-chips now? Moscow-based Kazimir Partners seems to think so while others will disagree.

Oil Bourse

There are some fears that the high oil prices will mean that oil will not be traded on exchanges, with direct contracts between the government and the client prevailing. The January debut of the oil burse could have problems, as the private oil companies do not have the necessary availability of oil in order to trade it on the domestic exchange. In order for the oil bourse to be a success, there needs to be liquidity, something which will be difficult to accomplish even if state-owned companies will be given the order to provide a minimum amount of products to be traded.

Vedomosti, The Economist, RusEcon, Gazeta

Uralkali to IPO

Uralkali, one the biggest potassium salt producers in the world, will go forward with a 10 percent flotation which will net the company over USD350 million.

Last Friday, the board of Directors has decided to call for an EGM in order to vote on the underwriting agreement. The underwriter is still unknown to the public.

The company’ owner, Dmitry Rybolovlev, is the latest Russian billionaire to take his company public. Mr. Rybolovlev is considered to be one of the most opaque businessmen in Russia. 30th in the Forbes list of Russian billionaires, he now resides in Switzerland. In 1996 he was accused of murdering his business rival, but after spending only 11 months in prison he was released on bail and subsequently cleared by the courts.


Sunday, June 18, 2006

Arcelor's management should listen to its shareholders - The Economist

The battle for Arcelor is about more than steel

Mittal Steel's chances of taking over Arcelor are improving

The Economist has accused Arcelor’s chief executive and chairman of trying to save their jobs at the expense of Arcelor’s shareholders, by backing Severstal’s acquisition of the company.

  • Euro-Nationalism. Arcelor’s management affirms that Mittal Steel is not in-tune with ‘European Values’, despite the fact that it is registered in Holland and run out of London.
  • Hypocrisy and bad standards of corporate governance. Proposed merger with the Russian opaque giant would put Mr. Mordashov as the dominant shareholder.
  • The victims. Arcelor’s shareholders are denied a say in this, despite the fact that a third has demanded a vote. The management insists that the law allows it to proceed with the Severstal deal without any vote at all. Perhaps, as The Economist suggests, shareholders should sell their stakes to Mittal by July 5th, so that Mittal will have the 50 percent necessary to make the Severstal deal fall through. This would punish the management team which exploited shareholders’ rights.
  • Most analysts favor the new Mittal offer, while the management prefers the Russian variant. Shareholders should be able to decide.

The Economist

Thursday, June 15, 2006

Russia to have sole regulator of financial services

[Added Link + Update]

A proposed sole regulator will have the powers to maintain vigilance over banks, insurance companies and the financial markets.

The new regulator’s employees will be full-time professionals appointed by the government. The concept of a sole regulator was thought up by the Federal Financial Markets Service and it will be presented to the public within a year, in March 2007.

Currently several regulators control the financial services in Russia. For example the Federal Financial Markets Service looks over Russian stock markets, Rosstrakhnadzor maintains control over the insurance sector, while the Ministry of Finance – over pension funds. The Central Bank regulates the banking system.

In fact, anyone familiar with Great Britain will notice that this new concept is similar to the FSA (Financial Services Authority), which is an independent non-governmental body with statutory powers given by the Financial Services and Markets Act 2000. The FSA is financed by levies imposed on all authorised companies. Thanks to this new regulator, London is seen as having one of the best regulatory systems on the planet, a far cry from the fragmented and inefficient system that was there before.

The Russian version looks good on paper, but it remains to be seen whether the idea will work. Currently the government cannot even agree whether such regulator is needed. Some affirm that the system works fine as it is now and no major change is necessary. Other officials are on record saying that no firm proposal will be accepted before 2009. The idea of taking away powers from the Central Bank has also drawn criticism.

Vedomosti, RC

Related Article:

New insider dealing legislation brought in

State monopoly in newspaper market

Around 20 of Russia's largest state-run newspaper printing companies may be integrated into a single holding. Publishers fear that the new monopoly will dictate conditions to them.

Market players say there are about 30 federal newspaper printers in the country. After the largest state-run regional printers merge, as happened in the Soviet era when the Partizdat system was formed, the country will see a large group of printers monopolizing the newspaper market, which is estimated at USD250 mln, including paper cost.

"State-owned printers still control a significant 50 percent of the Russian newspaper market," said Viktor Shkulev, head of the Board of the Ashet Filipaki Shkulev publishing company. "However, control over these printing companies is dispersed, and they fail to cooperate in protecting the interests of printers from publishers."

Market players are concerned that such a large network of printers would be better positioned than private printing companies in buying paper, which makes up 50 to 80 percent of the total newspaper cost, and would establish a large degree of control over publishers, especially in certain regions.

According to Soyuzpoligrafprom, which developed the concept of integrating state-run printers, the current value of all the companies to be united is not more than USD100 mln. The network may be privatized after the first stage of the reconstruction, to last from six to twelve months. Concept designers say the network will then be worth USD300 mln.

Marina Pereverzeva, vice president of the Promsvyazkapital Group, which controls media assets, believes the privatization scheme would be less effective and transparent than the sale of separate companies. Other market players have similar views. "Consolidating newspaper printers under the control of a single company is economically inadvisable," said Vadim Goryainov, head of the Novaya Tipografiya Company and president of the Popular Press publishing house. "And if economically inadvisable acts are being carried out, this would suggest that they are being done in the interests of a limited group of individuals."

Kommersant, RIAN, RC

Wednesday, June 14, 2006

Gazprom begins its attack on the Yamal project

[Update 1]

Gazprom does not want to see foreign companies undertaking the Yamal peninsula liquefied natural gas (LNG) project, and has involved the courts in order to get the right to work on the project by itself.

Gazprom owned 25.1 percent of Tambeyneftgaz, which gave the license to another company, Yamal LNG, in order to attract foreign companies such as Repsol. Since Gazprom has refused to participate in the project designed to attract foreign players onto its turf, the controlling stake in the Yamal LNG field now belongs to the chairman of Tambeyneftgaz, Nikolai Bogachev. The other 49 percent were supposed to be shared between Repsol, Shell and Petro Canada.

Gazprom-Invest, part of Gazprom, has involved the courts in alleging that the transfer of the license to develop the field is illegal.

Yamal LNG was to develop and transport gas by itself, bypassing Gazprom’s export network, something which angered the monopoly. Gazprom needs to increase its reserves and getting rid of rivals to develop the Yamal field is the surest way of doing so – argue the analysts.

Gazprom is not the only company which tried to acquire a piece of Tambeyneftgaz. Dmytro Firtash’s partners, the co-owners of RosUkrEnergo, also attempted to buy a stake in it, but failed to reach an agreement after Bogachev demanded a USD400 million price tag, something that the prospective buyers thought was far too steep.

Gazprom’s mission is to show the world that it can fulfil all of the demands placed on it. However, in order to do that, it might have to import additional gas from Central Asia as it does not have enough. Additionally it needs to have access to ALL of the new development projects. In order for that to happen, competitors have to be barred first and this is where the state comes in with its General Development Scheme plan which details the future of the energy sector and places Gazprom as the only candidate for the development of any new gas project in the country.

Vedomosti,, RC

Related Article:

Gazprom warns Repsol to stay away from Yamal

Where is the RTS headed next?

Following the worst stock market day performance for over 1.5 years, here are some predictions:

  • Deutsche UFG – 1450 at the end of 2006. 2007-2008 is difficult to predict. RTS could go as high as 2000 and as low as 1000 or worse.
  • Uralsib – 1750 at the end of 2006. However a real sell-off could be on the horizon.


Tuesday, June 13, 2006

Sales techniques enticed pensioners into investing in stocks

[Update 1]

The Russian government has used public communication and media in order to pressure private customers, who know little about the stock market, into investing their money on the market.

The massive growth prospects of the stock market were highlighted not only in business media, but on state-controlled television as well. For example, 9AM television news, watched primarily by pensioners and other unsophisticated investors, featured pieces on the “incredible” possibilities of making money on the stock market. It is then not surprising that pensioners flocked to invest in shares. A quarter of a Russian brokerage company Finam’s clients are over 50.

Pensioners have a long history of bogus advertising targeted at them. Several state-owned radio stations transmit 10 to 20 minutes worth of questionable adverts before news bulletins, which are mostly popular with the older population. These adverts usually push unproven medicaments and relate to offers which deceive the pensioners into giving up their homes for virtually no money.

Some two weeks before the Gazprom stock nosedived, the monopoly’s Deputy Chairman Alexander Medvedev has used state television in order to declare that Gazprom’s market capitalisation will reach USD1 trillion. Following the announcement, the share price went up in the short term.

Additionally, employees of many companies connected to the state were told by their bosses that they must invest in Russian companies. When the first correction occurred, many of those that invested were given bogus explanations and promised big returns in the future. While these employees were actively discouraged from selling their holdings, those closer to the government were busy cashing in on the stock they bought years ago.

Most of the April and May investments made by private customers went into Gazprom, Transneft and Sberbank. When these clients ring up their brokers, the salesmen used hard-sell techniques in order to convince people that buying Gazprom only is not good value for money and that the customer needs to buy stock in other companies as well. These companies were usually much more risky for the investor, but provided a higher commission for the brokers. Only 12.5 percent of customers managed to leave the broker with only Gazprom shares in their portfolios.

Massive influx of investors may have helped the market produce big results, with the RTS gaining 40 percent in the first four months of the year. However, when the market declines rapidly, it’s usually those that were pressurised into buying that suffer the most.

RC, Vedomosti

New insider dealing legislation brought in

The May 15th “Black Monday” was caused by insider dealing. That is the opinion of several high ranking officials, and the new legislation being brought at the end of 2006 is designed to dissuade people from trading on inside information.

“As there are no fundamental reasons for the market to collapse, we can suspect that it was caused by insider trading,” Oleg Vyugin, Chairman of the Federal Service for Financial Markets, said. If this was the case, he added, large-scale strategic investors were to blame, not speculators. At the same time, it has to be said that the official stressed there was no firm evidence that the fall was caused by insider dealing. This mirrors the affirmation by Andrei Kozlov, Senior Deputy Chairman of the Central Bank, who also told reporters that Monday’s the 15th of May fall was largely triggered by insider trading.

According to Oleg Vyugin, the Russian stock market has to have a reliable defense system against insider dealing, if it is to compete with other leading markets in the world. The new legislation will begin with including 15 practices which will be prohibited under the law. The legislation is based on that of the EEA, according to Vyugin.

Under the new laws, the regulator will only have the right to conduct an investigation, and if it does find something, then it will pass on all the necessary information onto the Ministry of Internal Affairs. The regulator can question not only individual dealing on price-sensitive information but also those that can be providers of inside information, such as family members of the company’s directors.

What sets the Russian Insider Trading legislation apart from some Western ones is the fact that the Russian Insider Dealing offence is only a civil one. That means that the courts cannot impose prison sentences, only fines. In that sense, the new legislation is similar to the Market Abuse FSMA2000 S118 law in the United Kingdom.

Oleg Vyugin stated that it is his belief that the new system will be effective when dealing with this widespread problem on Russian Stock Market. The majority of blue-chips are said to be trading on insider information, with GAZP being one the worst.

Full implementation of the law is expected in Spring 2007. It remains to be seen whether it will curb the practice that puts the majority of investors at a severe disadvantage on the market.


Monday, June 12, 2006

Banks mislead about profits in order to escape tax

Twenty six banks have lied about their profits, in order to escape paying more taxes. The real profit made by those banks is some RUR11.6 billion higher that the reported figure. The Central Bank has decided against naming and shaming.

In order to manipulate their profits, banks can deposit more capital into the various reserves available to them and/or customer accounts, amounting to a so-called ‘pollution of trust’.

It was noticed some time ago that these banks were showing meagre results, however that was first attributed to poor management.

The fact that the banks are publishing misleading statements could mean that in the future they would commit a much more serious breach of their obligations, argue analysts.

The future of the banks is unknown. Fines are likely as are prohibitions.

RC, Vedomosti

Saturday, June 10, 2006

Russian car-making industry in danger of dying out

Russian national car-making industry is in danger of being squeezed out by its foreign competitors as over 50 percent of foreign cars sold in 2010 (up from 27 percent now) could be made in Russia.

The latest firms to sign contracts for manufacture in Russia are Nissan and PSA Peugeot Citroen, joining the likes of Volkswagen, General Motors, Ford and Toyota.

Most Russian factories are now engaged in construction and manufacture of foreign cars, with the only exception being AvtoVaz, who is and will be getting financial help from the state in tune to USD5 billion. AvtoVaz has around five to ten years to prove that it is able to mount a serious competition to the foreign car-making companies. Protectionist measures designed to help the Russians and thwart foreigners, such as an increase in import tax and the prohibition of right hand drive cars did not yield an expected result.

The state is protecting AvtoVaz because it employs or is related to around 5 million people in the country. A failure to compete with foreign companies would produce a sizeable social problem for the government. That might happen when the import tax will be reduced. It now stands at 25 percent (+1 euro) per cubic centimetre of the engine and it will gradually go down to 15 percent in the seventh year after Russia’s accession to the World Trade Organization. Thus, AvtoVaz MUST fundamentally improve its cars by 2014 at the latest, or risk being relegated to a status of a also-run and dying out.

The disappearance of the Russian carmakers, AvtoVaz included, might not produce a big social hit as the number of people employed by the global networks of car parts and servicing established by the foreign companies in Russia will employ millions of people, hence effectively substituting AvtoVaz in the market – argue analysts.

However, AvtoVaz has a slim chance of survival. Its advantages over the competition include price, vast network of servicing dealers and the nationalism of its buyers, who prefer to buy Russian rather than foreign cars. Additionally, subsidies and protectionism by the government does usually help national corporations, as it is argued by the management consulting firm McKinsey. For that to happen, a liberalization of the market has to happen, similar to China and India. Since the Russian market resembles the Asiatic ones, one can predict that if the Russian car-making industry is to survive it will not be AvtoVaz but a completely new player that will emerge as a challenger to the likes of Ford and Toyota. In that sense, the death of AvtoVaz might be a birth of the first truly competitive Russian car.

Vedomosti, RC

Friday, June 09, 2006

Non-energy companies grow slowly after IPOs

As IPO fever is about to hit Russia, a word of caution has to be sounded. Unlike 2004 IPOs, the majority of companies which held IPOs in 2005 were slow to grow and some even depreciated. Russian companies, unlike those in the West, might fall even in the first month after their respective IPO.

Six out of seven companies which held their Initial Public Offerings in 2004 grew faster than the RTS index. The story changed in 2005, with only three out of fifteen beating the index (which grew 83 percent in 2005 and added another 21 percent in 2006) and five depreciating with Amtel Vredestein loosing 38 percent of its value.

The lack of real growth by newly listed non-energy companies could be explained by the fact that the RTS is heavily inclined towards the oil and gas sector; hence its growth is higher than that of companies that are not related to the energy sector. Gazprom and Lukoil, spurred by high energy prices, managed to comfortably beat the index growth. With such prevalence of the energy companies on the stock market, investors are having a hard time diversificating their portfolios and a continuing rise in oil prices might make Initial Public Offerings by other companies seem unattractive.

Fast growth in the non-industrial sector (retail grew 50 percent in the last year) means that the companies’ owners want to cash-in, leaving little to an investor or a stag. Hence, they do not issue shares at a cheap price, even if an IPO might bring political security so needed with the upcoming difficult elections in 2008. The companies might be overpriced and any slowdown in the rapid growth of the past years may produce sharp declines in share prices.

Another explanation for the slower growth of 2005 IPO companies is that several conflicts between businesses and the state meant that many ‘traditional’ companies were far too cheap. After the Gazprom liberalisation, the blue-chips grew considerably faster than the new companies.

Many are reluctant to hold shares in newly listed companies and Morgan Stanley even refused to participate in the Cherkizovo IPO, alleging that the company’s proposed high share price was not attractive to investors. STS Media, last week, cut its proposed flotation share price from USD16-18 per share to 13.5-15.5.

Despite these warnings, there are too many gullible investors who are willing to pay attention to the hype the investment bankers spread on their road-shows. And as long as there are a good number of such investors, underwriters will always propose high priced IPOs, say the analysts.

Vedomosti, RC

Thursday, June 08, 2006

State-owned companies' debt mounting

Whilst Russia is paying back debt of the former Soviet Union, state-owned companies are borrowing more and more, something which is dangerous since in order to pay that debt back, crucial Russian assets will have to be sold. In the end it will be the government who will have to pay back the debt accumulated by state companies.

Russia’s debt stands at USD71.4 billion (down from 97.4 billion in 2005) while the figure for state-owned companies is much higher at USD176.2 billion (up from 108.2 billion in 2005). This means that in 2005, the government paid back 26 billion while the companies have borrowed USD67.3 billion. While the government is holding talks on paying back its debt to members of the Paris Club of creditors in the amount of USD12 billion, Vneshtorgbank is about to borrow USD4 billion by itself only.

The danger is as follows: in order to pay back their debt, companies are holding IPOs. It comes as no surprise that it is state corporations which hold the lead in Initial Public Offerings. Rosneft’s IPO in July will go towards paying back its accumulated debt in the amount of USD7.5 billion. The government and Russia is loosing part of an important asset in order to pay back the debt that was owed. The more debt, the more important energy assets will have to be given away to foreign investors, something which not only negates the riches brought on by high oil prices but something which could negatively impact Russia in the future.

Vedomosti, RC

Anti-goverment websites might come under hacker attack

The difficulty of controlling freedom of speech by the government on the internet might be solved with an easy method.

DDoS-attacks (Distributed Denial of Service) have been used to take down sites such as already and more attacks are coming, predict analysts. Additionally a moment of high political tension might see some other website-blocking technology being used in order to shut the websites down.

RC, Vedomosti

Electricity shake-up could solve energy woes - comment

The Russian government yesterday approved the liberalisation of the electricity sector from next year and cleared the way for the listing of generating assets on foreign exchanges.

This allows private investors to enter power generation sector and permits generating companies to hold IPOs to raise funds necessary to finance the necessary shortfall needed to modernize the system and avoid blackout crisis in the coming years, with Moscow being especially susceptible to them. The government hopes to raise up to USD4-5 billion by 2008. Generating companies will not be truly independent shareholder companies though, as RAO UES of Russia will remain the direct owner of them.

The decision is a rare example of structural reform and a victory for Anatoly Chubais, head of the Unified Energy System.

Mr Chubais said it could attract billions of dollars of private investment into generating capacity. "The fight is over. I believe there is no chance for any political opponent to stop this programme now."

Now it remains to be seen whether this fundamental shift will produce results so critically needed.

Financial Times, Mosnews, Moscow Times, RBC, RC

Related Article:

Russia facing gas, heat and electricity shortages

Russia set to establish Gazprom's export monopoly in law

Moscow has reacted angrily to the European Commission's campaign to secure the liberalization of the Gazprom's monopoly on natural gas exports.

On Tuesday, a bill on natural gas exports was submitted to Russia's parliament that would secure in legal form the existing practice, when the energy giant - the sole owner of the natural gas transportation network - controls exports.

Sources agreed that this was an open rebuff to Brussels, and the rush was due to the Kremlin's desire to have the provision on the statute books before the Group of Eight summit in July.

Valery Yazev, one of the bill's authors, said he hoped that it would be passed in all the three readings this month.

It is time the government declared natural gas a strategic commodity and put gas trade under total state control, like weapons sales, Yazev said. However, the bill provides for an exception for production-sharing agreements, including the Sakhalin II project, which is developed by a Shell-led foreign consortium.

Judicially, any company that has gas reserves in Russia can sign a contract with a potential buyer and demand the right to ship the amount to the border. Attempts are made regularly. The latest one was the intention of Spain's Repsol to acquire a controlling stake in regional producer Tambeineftegaz, which holds the license for the Yuzhno-Tambeiskoye gas fields with reserves of over a trillion cubic meters. The Spanish company hoped to build a plant at the field and to start independent gas exports. French Total eyed another independent gas producer, Novatek, 18 months ago, also with a view to exports.

Obviously, none of the transactions has a future in the current circumstances. The French company, which was told its conduct was "unacceptable," quickly changed tack and approached Russian gas reserves from the front door. This helped it to make it to the final stage of Gazprom's tender for the massive Shtokman gas field in the Barents Sea.

Vremya Novostei, RIAN, RC

State may take over Norilsk Nickel - analyst

Authorities are considering declaring nickel deposits strategic. Following this decision the industry itself - above all mining and metals company Norilsk Nickel - may come under state control.

"The scheme is simple," says Dmitry Parfyonov, an analyst with Prospekt brokerage. "First, nickel deposits are declared strategic, and then Norilsk Nickel itself may be brought under state control. The same scheme can be applied to VSMPO-Avisma Corporation, the world's largest producer of titanium products."

Partly foreign-owned joint ventures will be allowed to take part in tenders to develop strategic deposits only if their Russian stakes are not less than 51%, analysts forecast. This is the scheme used by Norilsk and Anglo-Australian RIO Tinto to set up JV RioNorGeologorazvedka, announced in January. The foreign stake in the venture is only 49%.

"Everybody knew that the state will declare nickel fields strategic, as it did with copper and gold deposits," says Vyacheslav Zhabin, a BrokerCreditService analyst. "The fact that the matter is still under consideration does not mean anything. Just look at current metal prices on world markets and their upward growth trends. The decision will not be slow in coming."

Zhabin says the state's moves are justified: the world is hungry for resources, and control over one's own reserves should not be ceded. "The strategic status of the deposits will make things difficult for foreign companies, but they will cope with this somehow," the analyst says.

Nezavisimaya Gazeta, RIAN

Wednesday, June 07, 2006

War must be avoided - comment

There is now a possible danger that a violent conflict involving Russia could happen in the next few years. Whether a conflict will happen or not is in the hands of the Russian government.

The image of the “enemy” has fully crystallised in the minds of the Russian people, as it is reported by Levada-Centre. USA, Ukraine and Georgia are now seen as the primary enemies by the people, helped by isolationist rhetoric and aggressive foreign policy of the Russian state. The negative feelings towards the “enemy” are much stronger than the positive feelings towards the perceived allies of the country, notes the report.

The loss of individuality in the face of the “common enemy” has been known to happen before, especially visible during the 1930’s USSR, Hitler’s Germany and the Imperialist Japan. All of those countries ended in violent and bloody conflicts, something which must be avoided in the present-times Russia. There are a number of simmering conflicts on the country’s borders, with those with Georgia and Ukraine being especially worrying.

RC, Vedomosti, Levada

Societe Generale buys 10 percent of Rosbank

Société Générale has acquired a 10 percent stake in the Russian bank Rosbank for a sum of USD317 million. Additionally there is an option for an additional 10 percent, something which would take the French bank’s stake to 20 percent.

The limitation of 20 percent is due to the fact that the Russian government does not welcome foreign players onto the national banking scene. Selling a controlling stake in Rosbank was strictly prohibited.


Talking about stabilization fund's future is prohibited

The government, taking advice from an international law firm, is taking measures to prohibit officials from mentioning the possible ways the country’s stabilization fund could be invested in the future. This is done to minimize the risks of the foreign creditors taking steps towards freezing Russian assets.

Cleary, Gottlieb, Steen & Hamilton LLP (CGS&H) has warned that there is a possibility of such actions by persons who oppose the current political and economical situation in the country, especially as Yukos shareholders continue to try to recoup USD40 billion from the government via Russian and international courts.

Hence, “it is better to avoid premature talk of what to do with the stabilization fund” – said Prime Minister Mikhail Fradkov.

CGS&H’s relationship with the government also comes under fire as its opaque nature means that there are no contracts and the money paid to the company could be classified as “under the table”. Additionally it is unclear how the company was selected to perform advisory service to the government.

Analysts say there is a definite risk to Russian assets abroad, with Noga claiming success before. The unpredictable nature of Russian politics in the next few years means that state officials must hedge their risks in relation to the safety of the stabilization fund.

Vedomosti, RC

Tuesday, June 06, 2006

Government to decide on multinationals' influence on Russian security

The Economic Development and Trade Ministry, the Industry and Energy Ministry and the Russian Academy of Sciences will soon study the influence multinational corporations have on Russia's national security.

The results will be reported in the third quarter of 2006. The tight timeframe is no coincidence: the government is working on a bill that may restrict foreign investors' activity in strategic industries and, apparently, wants to obtain complete information on multinationals' presence in the country's production and the domestic market in general.

Dmitry Sorokin, deputy director of the Institute of Economics of the Russian Academy of Sciences, said that work on a system of interaction between the economy and multinational corporations was particularly important given Russia's potential forthcoming accession to the World Trade Organization.

"We have allowed multinationals to exert an overly strong influence in some sensitive industries, such as aircraft building," he said. "Russia's food security is also under question. We need norms that would regulate the activity of foreign players in the economy."

However, there are fears that officials will interpret the study as the instruction to find ways to block multinationals with restrictions and prohibitions.

Iosif Diskin, co-chairman of the National Strategy Center, said the government had decided to consider the issue after the latest developments around the Sakhalin II energy project.

"An analysis of the transaction raised questions from the country's leadership, because revenues from the produced oil will be distributed only after the investor has covered the expenses. There are suspicions that foreign partners are exaggerating their expenses," he said. "Another important issue is future agreements on Russian natural gas fields that will be developed with foreign firms."

Novye Izvestia, RIAN

Investment in the energy sector critically needed

The Russian energy sector suffers from years of dangerous underinvestment and that needs to be changed if the country wants to avoid the risk of having massive shortages of electricity, oil and gas.

The electricity consumption figures for 2005 are 940 billion Kilowatt-hour units (down from 1074 in 1990), although Moscow’s consumption has risen considerably. Electricity outages could impact the GDP growth by as much as 5 percent. To combat electricity deficit, over USD15 billion a year of investment is needed, but the current figure is that of only USD5 billion a year. A series of IPO’s could in theory attract investment but the future will show if that is the case.

The situation in the oil and gas sector is as critical. According to specialists, the state monopoly Gazprom needs to invest USD11 billion each year just to fulfil all of its obligations. The Yukos affair has seriously impacted the sector, slowing down the oil output growth (from 11 percent in 2003 to 2.5 percent in 2005) and impacting the yearly GDP growth by as much as 1.8 percent. What makes matters worse is that foreign investors are lining up to invest in the sector but the government is not allowing it.

Vedomosti, RC

Iskander Mahmudov enters into a cooperation with the state

Iskander Mahmudov, a notorious 1990’s businessman linked to various criminal scandals, has sold a stake in his company to the Russian state.

JSC Russian Railways has acquired a 25 percent stake in Transmashholding, a Russian transportation mechanical engineering giant for an undisclosed sum. Transmashholding’s capitalization is predicted by some analysts to be in the region of USD2 billion.

The new union between the companies will be headed by Russian Railways’s Vladimir Yakunin.

This sale follows a now familiar scenario where private companies have to merge with or be acquired by state-controlled companies in order to isolate themselves from potential political and economical risks and/or minimize their chances of falling foul of the authorities.

Vedomosti, RC, Kommersant

Monday, June 05, 2006

Biggest foreign deal in Russian history will not happen for now

VimpelCom, Russia's second largest cell phone operator, will not purchase Ukraine's largest mobile operator Kyivstar for USD5.456 billion in the foreseeable future in what would have been the biggest overseas deal in Russian business history.

VimpelCom chief executive Alexander Izosimov said Thursday the major shareholders of Alfa Group and of the Norway-based Telenor communications, IT and media company, had failed to reach progress after three months of talks and would not acquire 36.3 percent and 36.1 percent stakes in a joint company.

Telenor representatives said the termination of duel partnership - when a conflicting shareholder could launch a process enabling only one partner to buy out all shares - was the main pre-condition for the VimpelCom-Kyivstar merger. But this scuppered the talks because Alfa Group refused to buy a 100 percent stake in the new joint company.

Experts said in early February that the deal was unlikely to be concluded. "The talks have been unsuccessful for the last month and the parties have basically returned to their initial positions," said Konstantin Chernyshev, senior analyst with Uralsib financial corporation. "VimpelCom is expanding aggressively in Ukraine and will soon pass the point of no return in terms of investment, which means a merger with Kyivstar would be pointless."

"Conflicts are a typical feature of Alfa Group, which has profited during the merger talks, strengthened its ties with the VimpelCom management and enhanced its positions in Kyivstar," Boris Ovchinnikov, analyst of J'Son & Partners consulting group, told the paper. "Alfa Group possibly needed tactical victories during the talks rather than the merger itself."

VimpelCom ADRs had risen 4.95 percent on the New York Stock Exchange by 21.00 p.m. Moscow time Thursday despite the news. "VimpelCom's impressive first-quarter performance and its successful initial start in Ukraine reduced the impact of the bad news about Kyivstar," said Nadezhda Golubeva, an analyst at Moscow-based Aton brokerage. "The better VimpelCom's subsidiary in Ukraine develops, the less investors will care about how it entered Ukraine."

Kommersant, RIAN

Rosneft flotation not a people's IPO

It has been revealed that in order to buy shares in the upcoming Rosneft flotation a person would have to agree to spend more than RUR20 thousand. Thus, this cannot be called a true people’s IPO, since the monthly average Russian wage is just RUR10 thousand - say the analysts.

People behind the deal have argued that it will be too expensive to lower the entry requirement and indicated that it is the shareholders which decide such matters.

The Kremlin will float a stake of USD8-13 billion in state oil firm Rosneft just days before it hosts a Group of Eight summit, as it wants to present the IPO as its input to global energy security, bankers said on Monday.

Vedomosti, Reuters

Gazprom warns Repsol to stay away from Yamal

Gazprom has warned that it will prohibit the USD6 billion joint-project between Repsol and Tambeyneftgaz for a liquefied natural gas (LNG) in the Yamal peninsula.

Gazprom’s management is unhappy at the fact that it has lost out on the participation in the Yamal’s South Tambei gas condensate field. Gazprom Group wanted to own the controlling stake in the project while the rest should have been distributed between foreign companies which include Repsol, Shell and Petro Canada. However, Nikolai Bogachev, the chairman of Tambeineftegaz, is said trying to block attempts by Gazprom to control Tambeyneftgaz, thus generating anger within the monopoly.

Gazprom has involved the government in trying to regain to control in the project. GazpromBankInvest has sent a letter to Mikhail Grishankov, first deputy chairman of the State Duma (lower house) security committee, complaining about the actions of the Bogachev and Tambeyneftgaz. Such tactics are likely to work and Bogachev has already admitted that he will sell Gazprom any stake it desires in the project.

Analysts argue that this shows that foreign energy companies cannot work in Russia without GAZP’s permission, much like TNK-BP cannot start developing its proposed East Siberia gas project because Gazprom considers it premature.

Vedomosti, RC