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The Russian stock market continued to grow reaching new peaks due to positive internal and external news early in the second half of the month. The growth was driven by good-performance corporate financial statements for the first half of the current year, approvals of high dividend payments at several companies, and record-high oil prices. In spite of that August is traditionally considered a slack period for the stock market, the investment activity remained high though. Most significant corporate news included good Gazproms export performance, high dividends paid by Sibneft, as well as Sberbanks good performance report. Among positive investment news was a loan agreement between Rosneftegaz and a syndicate of western banks, which is secured by less than 50% of Rosnefts equity.

Investors considered this news very good, because the loan will allow the Russian government to complete its purchase of 10.74% of shares in Gazprom hence improve chances of rapid liberalization of the share market of this monopolist.

However, the price growth in the Russian stock market slowed down markedly at the end of the month, which could be explained by overestimated market outlooks by investors. At the same time, no profit fixation was virtually noted in the market. On the contrary, the record-high oil prices encouraged purchase of oil securities thus pushing the prices of primary industry companies to reach new peaks and effecting other liquid securities. In this case, the RTS index gradually kept growing to reach its new historical peak of 876,05 points on Monday, August 29, 2005. It should be noted that the summer jump in the market was accompanied by a stable demand of non-residents improving their Russian assets positions.

In the period between August 1 and 29, the RTS index grew up by 11.97% to reach 876,05 points, which is 93.65 points in absolute figures. The trading turnover of RTS index shares totaled nearly $833.8 ml US dollars with the average weighted turnover being $39.7 ml US dollars ( about $466.ml US dollars with the average daily turnover of $31.08 ml US dollars in July ). Hence in spite of a holiday season, investors were far more active in August than in July 2005. Maximum and minimum trading turnover figures totaled $62.7 ml US dollars ( on August 16, 2005 ) and $9.8 ml US dollars in August ( on August 1, 2005 ) respectively, as opposed to $53.33 ml US dollars and $7.76 respectively in July.

Market value of all blue chips grew up, except for Mosenergo shares ( -1.8% ), as based on the data on monthly figures ( in the period between July 22 and August 30, 2005 ) Tatneft shares ranked second to none in the trading list in August, its quotations jumped up by 23.5% during the month. Shares of Lukoil and Surgutneftegaz demonstrated a slightly slower rates of growth, their prices grew up by 19.77%. Shares of Sberbank of Russia, Rostelekom, Sibneft and Norilsky Nikel grew up at slightly slower growth rates during the month: by 14.97%, 7.32%, 5.99% and 5.53% respetively. Shares of YUKOS and RAO EES of Russia barely grew up by 2.11% and 1.67% respectively in August, thus showing the slowest growth rates among Russian blue chips during the month.

Figure 3.

90 900.The total volume of trading ($) 850.The RTS Index 800.750.700.650.600.550.500.450.400.350.Figure 4.

Dynamics of the Russian Blue Chips from July 22 to August 30, 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% -5.0% Change in price (%) points mln US dollars s Tatneft Sibneft GMK LUKoil Russia Russia NorNikel RAO UES Mosenergo Rostelekom Sberbank of Surgutneftegas In July, shares of OAO Lukoil ( 24.81% ) and RAO EES of Russia (19.21% ) and Norilsky Nilel (11.89% ) were ranked the leaders in terms of turnover in the RTS 9. Hence total turnover of shares of these three issuers accounted for nearly 55.9%. In addition, shares of Sibneft, Rostelekom and Sberbank of Russia also ranked among the leaders in terms of turnover in the RTS according to the results of week trading within the month.

The top-five list of leaders in terms of capitalization is as follows 10: Lukoil $41.22 bln US dollars, Surgutneftegaz $34.06 bln US dollars, Sberbank of Russia $16.97 bln US dollars, Sibneft $16.93 bln US dollars, Norilsk Nikel $15.39 bln US dollars, as based upon the data as of August 30, 2005.

Futures market. Activity of investors at the RTS (FORTS) futures market increased markedly in August as opposed to July. Total turnover of the RTS futures and option market accounted for nearly 67.39 bln rubles (153.94 thousand transactions, 4.69 million contracts ) In the period between August 1 and 29, 2005 as opposed to 29.96 bln rubles ( 107.59 thousand transactions and 3.05 million contracts ) in the period between July 1 and 22, 2005.

Futures were in the largest demand among market participants: the futures market turnover over the period under review accounted for 60.71 bln rubles ( 145.18 thousand transactions and 4.05 million contracts ). Options were in a far less demand in the market the option turnover amounted to nearly 6.68 bln rubles (8.75 thousand transactions and 640.15 thousand contracts ). The maximum trading volume in the futures market accounted for 5.35 bln rubles on August 17, while the minimum one was 1.89 bln rubles on August 1.

Corporate Bond Market.

The Russian corporate and regional bond market grew considerably in August as compared to the previous months in summer. Quotations of most liquid issues grew gradually early in the month, which was caused by strengthening of the national currency against the US dollar, improved ruble liquidity, as well as the Fitchs upgrade of Russias sovereign credit rating. Slower growth in quotations of these bonds than those of government bonds were partially governed by the fact that investors expected placement of Gazprom bonds scheduled in the first half of the month. Prices of bonds slightly dripped due a technical correction that took place in the beginning of the second week in the month, but then grew up again driven by an upward trend in quotations. A successful 5-bln-rubles placement of Gazprom bonds became a significant event in the market: the demand for these bonds was twice as much the supply, with totaled about 12 bln rubles. Under the circumstances, receipt of the funds that were not included in the auction was partially responsible for growth in quotations at the end of the week.

Quotations continued to grow in the beginning of the second half of the month as well. A recordbreaking level of liquidity in the banking sector over the last three months became one of the most significant growth factors. There was no any notable trend for prices of bonds in the market at the end of the month. On the one hand, further growth of prices was restricted by a certain decline in the volume of idle ruble funds. On the other hand, the growth in quotations of Eurobonds pushed up ruble bonds, including corporate and regional ones.

In the period between August 1 and 29, the price index of corporate bonds traded in the MICEXgrew by 0.64 points ( +0.57% ), while the index of the top-10 most liquid corporate bonds grew by 1.05 points ( +0.90% ). In the period between August 1 and 26, the total turnover of the corporate bonds market sector in the MICEX totaled about 11.58 bln rubles with the average daily turnover of 579.1 ml rubles ( about 14.95 bln rubles with the average daily turnover of 996.7 ml rubles over the first three weeks in July ). Hence the turnover of the corporate bonds issued by Russian companies slightly decreased as compared to the corresponding figures in July 2005.

In a classic stock market.

According to the RTS data.

The calculations were based on the corporate bond indices traded in the MICEX and calculated by Zenit Bank.

Figure 5.

Dynamics of corporate bond indices 122.ZETBI-Corp ZETBI-Corp120. Factors Effecting the Russian Stock Market.

Situation in the oil market was extremely favorable in August. Oil prices reached historical peaks approaching towards $70 per barrel. Several factors that supported oil quotations could be highlighted. The International Energy Agency (IEA) forecasted a decrease in oil production for OPEK non-members in 2005. Statistics on gasoline reserves in the United States was an evidence of their reduction within several weeks. In addition, the representatives of US official authorities stated that it is inadmissible to use the Strategic Petroleum Reserve, which can also be considered a positive factor for quotations movement. This was followed by slow-down in the movement of quotations which consolidated at the level of about $65 per barrel. IEAs data on gasoline ramp-down were responsible for the market correction as well. The correction lasted for a short period of time though. Oil prices reached a new peak of $70 per barrel late in August, which was mainly caused by the Catharine hurricane which caused considerable damages in the United States as well as sharp reduction in oil production in the Galf of Mexico. The real adverse affect was found to be more devastating than it was expected.

The situation in the world stock markets remained manifold in August (see Table 1 ). Basic stock market indices in the United States, Europe and a number of developing countries were effected by a downward trend during the month, while other indices of developing countries were growing in the same period.

In general, the US basic stock market indices were declining during the month. In the beginning of the month, the market went down as effected by technical factors, extremely high oil prices and growth in government bonds on the threshold of a meeting of the Open Market Committee under the US Federal Reserve System. A certain support was rendered by positive economic statistics reporting a sufficiently high economic growth rates. The indices continued to decline thereafter, which was mainly caused by another jump in oil prices thus increasing the likelihood of economic and inflation growth. In addition, it seems that the Catherine hurricane also encouraged bear transactions, because its devastating aftermaths affected both the US oil production industry and other industries, especially in the states exposed to the disaster. Figure 6.

160% Dow Jones Industrial Average NASDAQ Composite 150% The RTS Index 140% 130% 120% 110% 100% 90% 80% It should be noted in analyzing the effect of external factors on the Russian stock market that investors focused only on oil quotations ignoring the negative trends which dominated in the markets of developed and several developing countries. Not only did the extremely high jump of oil quotations supported prices of Russian securities, it also stimulated resident and non-resident stock market speculators to place new purchase orders. This stimulated a rapid growth and new historical peaks in quotations in the stock market.

Corporate News OAO Lukoil The volume of Lukoil securities trading in the London Stock Exchange totaled nearly $50 bln US dollars over a period of three years. In July 2005, the trading volume of Lukoil securities at the London Stock Exchange totaled $3,3 bln US dollars, which is a historical peak since the original trading session on this security. In addition, Lukoil securities has been remaining most liquid securities since 2004 among the securities of foreign issuers traded in the London Stock Exchange.

OAO Gazprom On August 11, OAO Gazprom placed its ruble A6 bonds at the total value of 5 bln rubles with rubles par value and 4-year maturity. The rate of the coupon payable every 182 day was determined 6.95% per annum as a result of an Auction conducted in the MICEX. Investors submitted 158 applications of more than 12 bln rubles total value. Forty five applications were accepted during the Auction.

The securities were placed with a record-breaking law yield as compared to other corporate bond issues with the similar maturity. The borrowed funds will be used for the purpose of financing of the investments to support current production facilities, implementing new promising projects, as well as refinancing short-term debts and optimizing debt portfolio structure.

Norilsk Nikel Standard&Poors Ratings Services international rating agency (Standard&Poors) upgraded from BB to + the long-term credit rating for GMK Norilsk Nikel on August 10, 2005. The national scale credit rating was upgraded from ruAA to ruAA+. The rating upgrade forecast is stable. A report made by Standard& Poors says that the granted rating reflects the leading position of GMK Nikel in the world market of nickel, palladium, platinum and copper, as well as the unique resource base and financial security of the company. While business climate in Russia remains a major factor constraining Russian companies credit ratings from being upgraded, GMK Norilsk Nikel demonstrated high financial and operational performance and positioned itself as one of the strongest corporate borrowers in the country. The stable forecast includes Standard&Poors assessment of a program on allocation of gold-mining assets which is currently under consideration by Norilsk Nikel.

Standard&Poors believes that the program is unlikely to have a significant impact on diversification of the group and result in substantial cash outflow.

Slavneft The shareholders of NGK Slavneft will be offered to approve dividend payment for the period of six months in 2005 on the basis of 1,61 rubles per a common share at a 0,1 kopeks par value at an Extraordinary Meeting of Shareholders to be held on September 20, 2005. This decision was made at a meeting of the Board of Directors of the company on August 5. 7 654 323 180 rubles will be allocated for dividend payment. The Extraordinary Meeting of Shareholders will be held on the basis of absent voting. A list of shareholders to participate at the Extraordinary Meeting of Shareholders was made on the basis of the register of shareholding dated August 5, 2005.

Rostelekom On August 2, 2005, the company published a statement of its performance in the first half of 2005.

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