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LUKoil Tatneft Rosneft Gazprom Russia Mosenergo Rostelecom Sberbank of Gazprom neft GMK NotNikel Surgutneftegas RAO UES Russia ary 28, 2008, the total turnover in the RTS futures and options market amounted to approximately RUR 954.6 bln (1449 thousand of transactions, 15.5 mln of contracts) against about RUR 1399.3 bln (1704 thousand of transactions, 21 mln of contracts) in December.

The greatest demand, as before, was for the futures: the volume of trading in futures in the period under review was RUR 811.2 bln (1412 thousand of transactions, 12.9 mln of contracts). Options enjoyed a far lower demand, with the volume of trading at about RUR 143 bln (37 thousand of transactions and 2.7 mln of contracts). The highest level of trading in the RTS futures market was RUR 89.5 bln (as of January 16), the lowest was RUR 24.9 bln (as of January 9).

Corporate bond market In January there were no expressed changes in quotations of securities, traded in the corporate debt market. Rather favorable situation with the liquidity in the banking sector, as well as the lack of large placements supported the market. However, the deterioration of the situation in the international debt market, a decline in the world oil prices and downfall of the stock market have negatively affected the quotations, and despite the explicit growth in activity (exceeding 40per cent as compared with the preceding month), there were no significant changes in the market situation.

From December 25, 2007 through January 25, 2008 the price index of corporate bonds, traded on MICEX18 has increased by 0.09 points (by 0.08 per cent), whereas the index of the ten most liquid corporate bonds have downgraded by 0.02 points (- 0.02 per cent) (see Fig. 5). Within that period the total turnover in MICEX corporate bond sector amounted to nearly RUR 82.5 bln with an average daily turnover of RUR 4.58 bln (about RUR 58.6 bln with an average daily turnover of RUR 2.79 bln in the relevant period of December). Therefore, the investors activity has noticeably increased within the month.

FIG. Dynamics of corporate bond indices 122,ZETBI-Corp ZETBI-Corp120,118,116,114,112,110,108,External factors behind Russian stock market dynamics In January the Russian financial market dynamics was dependant on the situation of the world financial markets. Thus, one should mention that downgrading of the stock market was the result of unfavorable situation in the external markets, based, in particular, on the negative news on financial losses of the top global financial companies, as well as the new recession trends in the US economy. Oil prices decline in the world market has served as an additional negative factor for the Russian stock market, as that indicator is one of the crucial factors of stability in the Russian economy.

The utmost effect on the market was provided by the information on the US debt market, where decreased retail sales, import prices and downgraded value of the US securities indicated a deterioration in the USA The calculation was based on indices of corporate bonds traded on MICEX. The indices were produced by the Zenit bank. forecast. However, the US FRS decision to decrease the refinancing rate to 3.5 per cent per annum (by 0.75 p. p.) has provided some positive impact on the market.

In general, external factors have provoked a downfall of the basic international stock market indices (see Table 1 and Fig. 6) Table 1.

Dynamics of international stock market indices Dynamics Dynamics since Data as of January 28, 2008 Ticker Value within the the year beginmonth(%)19 ning(%)MICEX (Russia) MICEXINDEXCF 1635,33 -15,24% -13,42% RTS (Russia) RTSI 1978,68 -14,09% -13,61% Dow Jones Industrial (USA) Average (USA) DJI 12383,89 -8,60% -6,64% NASDAQ Composite (USA) NASD 2349,91 -13,40% -11,40% S&P 500 (USA) SPX 1353,96 -9,52% -7,79% FTSE 100 (UK) FTSE 5788,9 -10,66% -10,35% DAX-30 (Germany) DAX 6818,85 -14,79% -15,48% CAC-40 (France) CAC 4848,3 -13,64% -13,64% Swiss Market (Switzerland) SSMI 7581,73 -10,47% -10,64% Nikkei-225 (Japan) NIKKEI 13087,91 -14,22% -14,50% Bovespa (Brasil) BUSP 58593,78 -7,14% -8,28% IPC (Mexico) IPC 26713,83 -10,52% -9,56% IPSA (Chile) IPSA 2658,74 -13,68% -12,88% Straits Times (Singapore) STI 3159,48 -8,01% -9,27% Seoul Composite (South Korea) KS11 1627,19 -15,23% -14,23% ISE National-100 (Turky) XU100 43706,68 -21,26% -21,30% Morgan Stanley Emerging Markets Free Index EFM 882,25 -11,59% -12,16% FIG. 6.

Dynamics of the main USA and Russian stock indexes (in % to the date 01.11.2006) 150,00% Dow Jones Industrial Average 140,00% NASDAQ Composite The MICEX Index The RTS Index 130,00% 120,00% 110,00% 100,00% 90,00% 80,00% Versus index indicator valid on September 27, 2006.

Versus index indicator valid on September 27, 2006. News Gazprom OAO "Gazprom" reviewed the preliminary results of gas reserves and production growth in 2007. According to tentative data, based on exploration works, in 2007 the growth of natural gas reserves amounted to more than 585 billion cu. m, what exceeds the planned volume by 7 billion cu. m. According to the recent information, natural gas production, made by "Gazprom" Group in 2007 (excluding affiliated companies), was 548.5 billion cu. m.

Gazprom Neft On December 2007, Gazprom Neft has completed the transaction on acquisition Ravninnoye deposit, located in Yamalo-Nenetsk Autonomous Area, the southwestern part of Krasnoselkupskoye region.

Currently Ravninnoye deposit recoverable oil reserves are 5.5 million tons in C1 category, and 1.7 million tons C2 category. Potential resource of the licensed site allow to increase the reserves by 5 million tons more after the exploration works. OAO Sibneft-Noyabrskneftegaz" is the owner of the license and explorer of the deposit. Pilot production at Ravninnoye deposit will be started in 2008, the highest production volume is planned to be reached by 2011.

LUKOIL LUKOIL and Gazprom Neft have established a joint venture OOO Oil and Gas Company Regional Development. LUKOIL share in the authorized capital of the joint venture makes 49 per cent, Gazprom Neft share is 51per cent. The authorized capital is formed of monetary assets, the joint venture is managed on parity basis. The company authority will include the acquisition of rights to explore mineral resources, subsurface geological studies, hydrocarbons exploration and extraction, field facilities construction and infrastructure projects implementation, as well as transportation and sales of extracted hydrocarbons.

NK Rosneft NK Rosneft has presented consolidated financial reporting in accordance with the USA GAAP for the third quarter and nine months of 2007. In the third quarter of 2007, earnings before interest, profit tax and depreciation (EBITDA), adjusted for additional penalties and fines, paid under "OAO Yuganskneftegaz" tax debt in the amount of USD 31 million, are increased by 90.7 per cent as compared with the indicator of the third quarter of 2006 (from USD 2126 to USD 4054 mln.) and by 13.2 per cent against the indicator of the second quarter of 2007 (from USD 3581 to USD 4054 mln).

In the first nine months of 2007, EBITDA ratio, adjusted for additional penalties and fines, paid under "OAO Yuganskneftegaz" tax debt in the amount of USD 373 million and USD (-13) million for the months of 2007 and 2006 accordingly, has increased versus the relevant indicator of the same period of by 47.1 per cent (from USD 6391 to USD 9399 million).

In the third quarter of 2007, the net profit, adjusted for additional penalties and fines under "OAO Yuganskneftegaz" tax debt (USD 38 million and USD (-75) million in the third quarters of 2007 and accordingly, has grown by 97.5 per cent in comparison with the third quarter of 2006 (from USD 976 to USD 1928 million), i.e., by 13.2 per cent against the second quarter of 2007 (from USD 1703 to USD million). Within the first nine months of 2007, this rate (adjusted for additional penalties and fines, paid under "OAO Yuganskneftegaz" tax debt)in the amount of USD 437 million and USD (-13) million for the nine months of 2007 and 2006 accordingly (with regard to the net effect of "NK OAO Yukos" bankruptcy proceedings in the amount of USD 6019 million for the first nine months of 2007), has increased against the relevant indicator of the same period of 2006 by 48.4 per cent (from USD 2917 million to USD 4328 million).

In the first nine months of 2007, oil production of consolidated businesses was expanded against the rate of the relevant period of 2006 by 19.6 per cent (from 427.67 million to 511.62 million barrels), whereas consolidated production with regard to NK "Rosneft" share in affiliated companies increased by 23.2 per cent in comparison with the relevant period of 2006 (from 431.23 million to 531.41 million barrels). One of the important factors of oil production growth in the nine months of 2007 versus the level of the relevant period of 2006 was further extension of the average daily well flow rate from 109.73 to 112.50 barrels. In the first nine months of 2007, gas production of consolidated businesses has grown by 14.6 per cent as compared with the rate of the same period of 2006 (from 10.13 billion to 11.60 billion cubic meters). Gas extraction with regard to the share of affiliated companies in the first nine months of 2007 has grown against the level of the same period of 2006 by 14.8 per cent (up to 11.63 billion cubic meters). In the first nine months of 2007, oil production from "NK Rosneft" reserves, including mini-refineries and refineries of the third par ties, amounted to 26.32 million tons, what exceeds the level of the relevant period of preceding year by 56.per cent (16.87 million tons).

Sberbank of Russia On January 25, 2008 "Sberbank of Russia" has disclosed the financial reporting, compiled in accordance with the international standards of financial reporting, for the first nine months of 2007. According to the report, Sberbank of Russia assets as of October 1, 2007 year amounted to RUR 4520.5 billion. The growth rate of the assets in the first nine months of 2007 made to 40.5 per cent per annum. In the nine months the shareholders funds have been increased by 94.7 per cent and reached the level of RUR 600.7 billion. The Bank net profit (as per IAS) in the nine months of 2007 amounted to RUR 69.9 billion, what exceeds the relevant indicator of preceding year by 22.1 per cent. Return on assets of the Bank (ROAA) in the first nine months of 2007 amounted to 2.3 per cent.

Budgetary and Tax Policy . Kirillov Federal government expenditures in 2007 have demonstrated an explicit growth (especially in the last quarter of the year) against the level of relevant periods of preceding years and this trend is sustained in 2008. Primarily it happens due to the policy, pursued in anticipation of the upcoming elections of the RF President. Considerable irregularity in budget expenditures during the year was maintained. Expressed deficit in oil and gas budget demonstrates the vulnerability of public finance system in the event of the world oil prices downfall.

In the fourth quarter of 2007, the expenditure part of the Russian federal budget has considerably increased. Within the year 2007, expenditures made RUR 5982 billion in nominal terms.21, or 18.4 % of GDP (Table 1). This exceeds the indicators of 2006 by 2.2 p.p. of GDP, whereas the level of federal revenues share in GDP remained practically unchanged.

Table 1.

Basic Parameters of the RF Federal Budget in 2005 2007 (% versus GDP) 2005 2006 Revenues 23,7% 23,5% 23,87% Expenditures 16,2% 16,2% 18,39% Deficit ()/ Surplus (+) 7,5% 7,4% 5,48% Source: RF Ministry of Finance, IET estimates The growth of the federal budget expenditures is not an unexpected event, it was forecasted. The main reasons behind it are mitigation of national fiscal policy, inspired by political decisions and preparations for the presidential elections, as well as annually emerging problem of irregularity in budget expenses.

One can see from Fig.1, that in the last quarter of 2007 the federal budget expenditures have exceeded the average level of the first three quarters (i.e., 15 % of GDP).

\With regard to amendments to the federal budget for 200722, RUR 180 billion from federal budget assets are allocated in the Bank for Development and Foreign Economic Affairs (Vnesheconombank), RUR billion are addressed to the Ministry of Education for the Russian Nanothechnology Corporation and RUR 90 billion to extend the RF Investment Fund.

RUR 240 billion from the RF Stabilization Fund assets are utilized to finance the. Corporation Foundation for the Reform of Housing and Utilities Infrastructure".

Let us consider the federal budget expenditures in detail (see Table 2).

Compared with the years of 2005 and 2006, in 2007 the largest extension of federal budget expenditures was made under such budget lines as national economy (+0.86 p.p. of GDP as compared with 2006, +1 p.p.

of GDP as compared with 2005), and housing and public utilities (+0.71 p.p. of GDP as compared with 2006, +0.86 p.p. of GDP as compared with 2005). Funding was also increased for such budget lines as federal issues, interbudgetary transfers, healthcare and sports, education. Doubtlessly, this is inspired by government policy and a large number of national projects and Institutions of Development. Overall, the share Peak indicator of the RF federal budget; in 2006 the expenditures amounted to RUR 4 298 billion.

Federal Law N 266 dated November 2007 On amendments to the Federal Law on the Federal Budget for 2007.

of budget lines, funding of which was extended as compared with 2006 level, exceeded 84 % of the total federal budget volume.

One can observe reduction in expenses as compared with the level of 2006 for social policy, as well as national security and law enforcement. However, the decline in funding of those issues is insignificant, it makes only 0.1 p.p. of GDP and is based on accelerated GDP growth. In nominal terms, expenditures under those budget lines have been increased in 2007 versus 2006 indicators by RUR 17.6 bln and RUR 114.4 bln accordingly.

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