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In May, the impact of the business situation on the world oil market and stock markets on the Russian financial sector was mixed. High oil prices, which reached their historic maximums, are a favorable factor for the Russian economy and should automatically facilitate a growth in prices of oil companies stocks. However, the positive impact of this factor on the dynamics of the domestic financial market was neutralized by a number of negative factors. Among these factors there should be noted the expected increase in the US interest rates, which determined the decline in demand for Russian ADR and outflow of funds from emerging markets, including Russia. Corporate developments in Russia also negatively affected the prices of securities. Limited liquidity of the Russian banking sector only increased the downward trend in spite of a certain adjustment of prices, which occurred later in the month.

Corporate news.

The OAO NGK Slavneft The Board of Directors of the OAO NGK Slavneft made the decision to recommend the shareholders to distribute the companys net profit amounting to RUR 8 billion 324 million 897 thousand in the following way: RUR 8 billion 319 million 916 thousand 500 should be paid as dividends. The amount of dividends per ordinary share (nominal value 0.1 kopeck) will make RUR 1.75. The amount of RUR 4 million 980 thousand 500 was recommended for transfer for replenishment of the companys own capital. The results of 2003 are as follows: the total amount of dividends to be paid per one ordinary share in the OAO NGK Slavneft will make RUR 4.77 taking into account the previously paid (after the first 6 months and 9 months of operation) amount of dividends. The annual general meeting of the Slavneft shareholders will take place on June 30 of 2004. The list of shareholders entitled to take part in the meeting was formed basing on the data presented in the register of shareholders as on May 12, 2004.

The OAO Rostelecom On May 17, the company presented its financial statement for the first quarter of 2004 made in accordance with the Russian Accounting Standards (RAS). In the 1st quarter, the companys total earnings made RUR 8.839 billion, what was by 38.9 per cent over the figures registered in the respective period of 2003. The EBITDA indicator made RUR 3.759 billion, increasing by 19.4 per cent in comparison with the figures registered in 2003. At the same time, the increase in net profits made by 125.1 per cent in comparison with the figures observed in the respective period of 2003, thus reaching RUR 2.809 billion.

The NK YUKOS On May 26, the Moscow Arbitration Court ruled to recover from the NK YUKOS RUR 99 billion (US $ 3.4 billion) in taxes, penalties, and fines for year 2000 with respect to the claim filed by the RF Tax Ministry.

At present, the company lacks available funds to repay the this amount. In connection to the fact that the prohibition to sell the companys assets is still in force, and it is impossible to realize the assets in order to attract liquid funds, the company informed its shareholders and creditors about the possibility of the companys bankruptcy in the case the Tax Ministry continues to take similar measures.

Table 1.

Dynamics f International Stock Market Indices Change within the Change since the Data as of May 263, 2004 Value month (%)11 beginning of the year (%) 629.99 -7.30% 7.49% RTS (Russia) 10109.89 -3.47% -2.88% Dow Jones Industrial Average (USA) 1976.15 -3.59% -1.52% Nasdaq Composite (USA) 1114.94 -2.25% 0.58% S&P 500 (USA) 4438.3 -2.88% -1.59% FTSE 100 (UK) 3867.3 -5.75% -3.76% DAX-30 (Germany) 3659.92 -3.98% 1.75% CAC-40 (France) 5671.7 -2.52% 1.59% Swiss Market (Switzerland) 11152.09 -7.99% 3.02% Nikkei-225 (Japan) 19069 -11.68% -15.04% Bovespa (Brazil) 10062.58 -6.15% 23.95% IPC (Mexico) 1417.97 -2.94% -4.49% IPSA (Chile) 1776.7 -4.87% -0.82% Straits Times (Singapore) 784.06 -16.24% -4.53% Seoul Composite (South Korea) 17235.48 -11.30% -9.99% ISE National-100 (Turkey) 426.191 -10.88% -3.83% Morgan Stanley Emerging Markets Free Index The Foreign Exchange Market. In the period from April 30 till May 26, the US $ / RUR exchange rate increased by about 9 kopecks to the level of RUR 28.97 per US $, what made circa 0.32 per cent. On the whole, during the month the exchange rate dynamics were mixed and the overall exchange rate remained at the practically same level as compared with the figures registered in early April. On the one hand, the further Ruble appreciation was supported by the extremely high oil prices, while, on the other hand, the Ruble exchange rate was negatively affected by the US dollar appreciation on the world market at the background of positive macroeconomic data in the USA.

The aggregate volume of trade in the US Dollar at the SELT in the period from May 5 till May 21 made US $ 7.4 billion, what was significantly below the figures registered in the respective period of April (about US $ 9 billion). The average daily turnover made US $ 618.33 million over this period as compared with US $ 582.8 million observed in April. During the period under review, the highest volume of trade in the US Dollar, about US $ 830 million, was observed on May 20; the lowest volume, US $ 427.5 million, was observed on May 7.

This May, the Ruble liquidity in the banking sector significantly decreased in comparison with the figures registered in the preceding month: in May, the average balances of correspondent accounts of credit organizations with the Bank of Russia made RUR 154.6 billion, what was by about RUR 26.9 billion below the respective indicator registered in April of 2004 (RUR 181.6 billion).

As compared to the level registered on April 23.

Figure 8.

Dynamics of the Official USD/RUR and EUR/RUR Exchange Rates in 2003- USD/RUR exchange rate 29.Official EUR/RUR exchange rate 28.Figure 9.

Dynamics of the Dollar/Euro Exchange Rate on the International Markets the period from April 31 till May 26, on the world forex markets there was observed no prevailing trend: in the beginning of the month there was observed a considerable appreciation of US $ against Euro due to publication of positive macroeconomic statistics, however later the US $ / Euro exchange rate returned to the band of about US $ 1.2 per Euro because of the impact, among other factors, of high deficit of the US balance of payments. Thus, during this period of time the Euro exchange rate increased by US $ 0.0124 making US $ 1.209 per Euro.

roubles dynamics of the Euro - Ruble rate were mainly determined by the trends on the world market. In the period from April 30 till May 26, the European currency appreciated by RUR 0.75 (2.21 per cent) from RUR 34.14 per Euro and made RUR 34.89 per Euro. The aggregate turnover of trade at the SELT amounted to Euro 114.5 million in the period from May 5 till May 21 (Euro 115.6 million in April). In this period, the highest trade volume of Euro was registered on May 17 at Euro 16.9 million, and the lowest, Euro 3.89 million, on May 5.

Table Financial Markets Indicators Month January February March April May* Monthly inflation rate 1,8% 1,0% 0,8% 1,0% 0,8% Inflation rate annualized on the basis of this 23,87% 12,68% 10,03% 12,68% 10% month's trend CB RF refinancing rate 14% 14% 14% 14% 14% Annualized yield to maturity on OFZ issues (%) 6,48% 6,15% 6,78% 6,78% 7,1% Volume of trading in the secondary GKO-OFZ 31,77 25,47 50,55 21,72 20,market for the month (RUR billion) Yield to maturity on Minfin bonds at the end of the month (% p.a.) 5th tranche 5,60% 5,36% 4,99% 6,38% 6,6% 6th tranche 4,01% 3,88% 3,54% 4,31% 5,1% 7th tranche 6,40% 6,15% 5,93% 7,25% 7,4% 8th tranche 4,77% 4,56% 4,22% 4,58% 5,6% Yield to maturity of Eurobonds at the end of the month (% p.a.) 2005 2,83% 2,77% 2,40% 3,00% 3,4% 2007 4,45% 4,20% 3,90% 5,11% 5,3% 2010 5,79% 5,68% 5,51% 6,34% 6,6% 2018 6,86% 6,82% 6,56% 7,53% 7,9% 2028 7,33% 7,25% 7,07% 8,10% 8,5% 2030 7,24% 7,08% 6,88% 7,97% 8,2% INSTAR-MIACR rate (% p.a.) on interbank 2,15% 1,76% 6,19% 17,54% 10% overnight loans at the end of the month Official RUR / US$ exchange rate at the end of 28,4916 28,5156 28,4853 28,8834 28,the month Official RUR / Euro exchange rate at the end of 35,3635 35,5076 34,8005 34,1431 35,the month Average annualized growth in RUR / US$ ex- -3,27% 0,08% -0,11% 1,40% 0,35% change rate Average annualized growth in RUR / Euro ex- -3,97% 0,41% -1,99% -1,89% 4,28% change rate Volume of trading at the stock market in the 432,75 433,12 613,91 830,27 RTS for the month (US$ million) Value of RTS-1 Index at the end of the month 611,10 670,14 752,66 631,11 Change in value of RTS-1 Index during the month 7,70% 9,66% 12,31% -16,15% -6,5% (%) * Estimate D. Polevoy Enterprises and organizations: the state of payments In the period from November of 2003 till January of 2004 the decline in outstanding and accumulated creditor indebtedness continued (see Figures 1 and 2). In January of 2004, the accumulated amount of outstanding indebtedness of organizations and enterprises in the economy made about 9.1 per cent of GDP (in 1998, in the period of the acute crisis, this indicator made 46 per cent (see Figure 1).

Figure 1.

The level of accumulated payment arrears (as the share of GDP):

dynamics in 1993 through 2003.

Creditor indebtedness of enterprises and organizations, in % of GDP Outstanding creditor indebtedness, in % of GDP The same for four sectors ( , ) 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 1993 1995 1997 1999 2001 * - prior to (including) 1997 for four sectors.

** - estimate.

Source: RF Goskomstat, calculations of the authors.

Note: the aggregate outstanding indebtedness of enterprises and organizations includes outstanding creditor indebtedness and the outstanding debts to the banking system. The creditor indebtedness is calculated as the sum of debts to suppliers, budgets of all levels, and extra-budgetary funds, indebtedness relating to wages and salaries, and debts to other creditors. Prior to 1998, the RF Goskomstat published payment arrears statistics for four sectors of the economy (industry, agriculture, transport, construction). Since 1998, the aggregate indebtedness in the economy has been calculated across all sectors of the economy.

The share of outstanding indebtedness in the total indebtedness continues to decline and makes about per cent (the maximum 55 per cent was observed in 1998, see Fig. 3).

In the first month of 2004, the amount of outstanding creditor indebtedness declined by 7.5 per cent (Rub.

98 billion). In the respective period of 2003, the outstanding creditor indebtedness decreased by 5.4 per cent, while the total decline in outstanding creditor indebtedness in 2003 made 8.9 per cent. There may be noted a certain increase in write off of outstanding indebtedness in 2003 in comparison with the figures registered in preceding periods, what indicates a certain intensification of processes of restructuring (see Table 1).

Figure Dynamics of outstanding creditor and debtor indebtedness across all sectors of the economy and branches of industry, agriculture, construction, and transport (4 sectors) in current prices.

Accounts payable (the left axis) Overdue accounts payable for all branches Overdue accounts payable for the 4 branches Overdue accounts receivable for all branches Overdue accounts receivable for the 4 branches 5 2 5 2 4 1 4 1 3 1 3 1 2 1 2 1 1 Source: RF Goskomstat, calculations of the authors.

Table Amounts of outstanding indebtedness of economic agents written off to financial results.

Creditor indebtedness written Debtor indebtedness written off off to profit to losses Total, Rub mil in % to overdue Total, Rub. mil. in % of overcreditor indebt- due debtor Period edness indebtedness 1997 874 0,1% 1 921 0,4% 1998 2 777 0,2% 7 990 1,0% 1999 5 597 0,4% 12 420 1,5% 2000 6 598 0,4% 21 955 2,4% 2001 10 185 0,7% 25 783 2,6% 2002 12 861 0,9% 24 000 2,6% 2003 19 996 1,5% 37 035 4,2% 1/2004 337 0,0% 548 0,1% Source: RF Goskomstat, calculations of the authors.

Debts in bln roubles Overdue debts in bln roubles 09/03/09/03/09/03/09/03/09/03/09/03/09/03/09/03/09/03/09/03/09/Figure Dynamics of the share of outstanding creditor indebtedness in the total creditor indebtedness.

The share of overdue accounts payable (in the 4 branches) The share of overdue accounts payable (in all branches) 70% 60% 50% 40% 30% 20% 10% 0% Source: RF Goskomstat, calculations of the authors.

Apparently, the growth in bank crediting and increase in demand for real cash balances played a positive role in normalization of payments. While before 1999 the dynamics of increase in non-payments mirrored the dynamics of money supply (see Figure 4), what to a certain extent characterized outstanding commercial credits as a substitute for bank crediting, since 2000 the dynamics of payment arrears and money supply diverge, what is an evidence of cash types of crediting squeezing out non-cash types. These trends are also observed in the structure of payments between monopolistic enterprises12 (see Figure 5). The share of cash payments made by these enterprises continues to grow and makes more than 90 per cent according to the data for January of 2004.

According to RF Government Resolution No. 10 of January 6, 1998, the RF Goskomstat conducts statistical monitoring of payments of largest Russias taxpayers: UES of Russia, Gazprom, Aeroflot Russian international airlines, organizations of the federal railroad transport, and industrial monopolistic organizations.

09/01/05/09/01/05/09/01/05/09/01/05/09/01/05/09/01/05/09/01/05/09/01/05/09/01/05/09/01/05/09/Figure Dynamics of increment in outstanding indebtedness and money supply (M2).

Differences of overdue accounts payable in the 4 branches (deflated) Monetary aggregates M2 (in real terms) 200 100 0 --100 Source: RF Goskomstat, CB of RF, calculations of the authors.

Figure Monopolistic enterprises: the structure of payments for shipped products.

100% in cash 80% by bills of exchange 60% by direct exchange of goods (barter) 40% by offsets 20% other types of settlements 0% Source: RF Goskomstat, calculations of the authors.

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