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During the year almost all of Russian 'blue chips' (with the exception of the companies in the power sector) demonstrated positive dynamics. Last year's growth leaders demonstrated excellent results this year as well. Income leaders were the shares of Sibneft (176.10 percent), Sberbank (159.71 percent) and Yukos (74.04 percent). The shares that changed to a lesser degree in value were: Tatneft (46.55 percent); Lukoil (36.80 percent); Rostelekom (35.69 percent) and MMC Norilsk Nickel (21.97 percent). As we have already mentioned, quotations of power sector companies diminished in value during the year: Mosenergo, -17.07 percent, and RAO UES of Russia, -20.87 percent. In the 'second tier' the maximum growth was demonstrated by privileged shares of Rosneft-Stavropolneftegas (1587.50 percent), ordinary shares of Rosneft-Stavropolneftegas (863.86 percent) and privileged shares of Tverenergo (548.percent); however, the trade activity was very low: only three deals have been struck with each of the aforementioned securities during 2002. One should also note privileged shares of Krasnoyarskenergo (185.91 percent), Slavneft-Megionneftegaz (144.1 percent) and ordinary shares of Orenburgneft (104.94 percent), the Chelyabinsk Tube Works (103.90 percent) and Slavneft-Megionneftegaz (103.22 percent). AvtoVAZ, last year's growth leader, grew only 46.99 percent in 2002.

The percentage of RAO UES's ordinary shares in the total turnover of RTS slightly decreased to 26.3 percent as compared to 32.86 percent in 2001; Lukoil's share grew up to 19.percent (16.65 percent); that of Surgutneftegas reached 10.65 percent (9.02 percent). Yukos that so rapidly entered the top five last year, retained its positions this year, growing up to 10.41 percent (13.2 percent); and OAO Tatneft grew 5.51 percent (5.06 percent). Thus, in 2002 the securities of the five issuers accounted for 72.18 percent of RTS's total turnover (in 2001: 76.91 percent).

In 2002 the volume of trade in Gazprom shares carried out via RTS terminals at the St.Petersburg Stock Exchange amounted to approximately US$ 1.01 billion (cca. 1.22 billion shares); a total of 111.9 thousand deals with the gas concern's shares have been concluded.

The value of the gas concern's securities grew 46.8 percent.

The largest number of deals, cca. 11.4 thousand, have been noted for the securities of RAO UES circulating in the RTS; Lukoil followed these with 6.2 thousand.

According to RTS, at the end of December the five Russian companies leading by capitalisation changed compared to 2001. Oil Company OAO Yukos took the top position (US$ 21,038 million); OAO Gazprom (US$ 18,039 million) and OAO Lukoil (US$ 13,099 million) followed. Surgutneftegas, last year's capitalisation leader, came only the fourth (US$ 11,million), and OAO Sibneft brings up the rear (US$ 10,478 million). It should also be noted that the share of oil companies in the total RTS capitalisation is cca. 60 percent. The fact that all largest Russian companies belong to the oil and gas sector testifies to the remaining structural distortions in the Russian economy and its orientation toward exporting raw materials.

Let us compare: OAO Sberbank, the capitalisation leader among the companies not belonging to the oil and gas sector or power sector, has US$ 3.629 billion; OAO Rostelekom has the INSTITUTE FOR THE ECONOMY IN TRNSITION http://www.iet.ru lowest aggregate value (US$ 870 million) among the blue chips, and the total capitalisation share of blue chips in the total RTS capitalisation is cca. 78 percent.

To explain the above-mentioned dynamics of Russian security quotations, let us examine in greater detail the following groups of factors:

internal political situation;

relationship with international financial organisations;

situation in international financial markets;

FORTS market of term contacts;

corporate news; and dynamics of oil prices in the world's markets.

We will examine the first five factor groups in this section. The last (but not least) factor, the dynamics of oil prices in the world's markets, has been surveyed comprehensively in the section "The Macrostructure for Preparation of this Survey"25.

Internal Political Situation It is important to note that the strengthening of political stability in Russia, the Government's steady economic policy and adoption of a number of key legislative acts by the legislative authorities have played a positive role in the successful growth of the Russian economy on the whole and the stock markets in particular. These factors have resulted in greater appeal of the Russian economy both for domestic and foreign investors. On 13 September the State Duma of the Russian Federation adopted in the third hearing amendments to the Federal Law "On the Stock Market". The new edition of the Law is aimed at making the Russian stock market more transparent. We would like to note that a notion of price manipulation has been introduced in the Law, which enables to protect the market from such schemes. Furthermore, the Law now contains tougher requirements to the contents of the prospectus and the issuer's quarterly report.

Relationship with International Financial Organisations The Government has been servicing the external debt according to the payment schedule and in full. A total of US$ 12.5 billion have been paid to creditor nations, banks, companies and international organisations and as interest on Eurobonds (including: US$ 6.2 billion as the principal and US$ 6.3 billion as interest). In 2003 the payments on external debt will amount to US$ 17.3 billion.

On 15 November, 2002, Mikhail Kasyanov, the Chairman of the RF Government, signed a Decree "On Introducing Changes in the Financial Terms and Conditions of Exchanging the Debt of the Former USSR Approved in Decree of the RF Government No. 931 of December, 2001 "On Regulating the Commercial Debt of the Former USSR to Foreign Commercial Creditors".

Last year Russia was excluded from the blacklist of the countries that are not active enough in preventing money laundering. Russia was included in that list in June, 2000, since it had no laws on preventing the legalisation of criminal incomes. Since that time the Russian Federation entered the international convention, passed a law on prevention of criminal income legalisation, established an authorised body, the Committee for Financial Monitoring, RUSSIAN ECONOMY in trends and outlooks created a system for fighting the laundering of dirty money and was admitted into Egmont Group the association of international financial intelligence services.

The upgrading of the Russian Federation's sovereign ratings reflects the positive changes in the Russian economy and the rating agencies' growing confidence in Russia's ability to ensure the servicing and repayment of the government's external debt in 2003 even in the event of a sharp drop in prices for energy carriers.

On 2 May, 2002, FITCH IBCA upgraded the long-term rating of the Russian Federation on borrowings in foreign and domestic currencies to BB-; the forecast for long-term ratings has been upgraded from stable to positive. The short-term rating has been confirmed on the B level.

In December international rating agencies upgraded sovereign ratings of the Russian Federation. On 5 December Standard & Poor's announced that it upgraded Russia's long-term ratings from BB- to BB+ on the liabilities in the national currency, and from BB- to BB on the liabilities in foreign currency on the international scale. Thus, the appraisals of the Russian economy have drawn near the investment rating that starts from BBB on the S&P scale.

Russia's rating on the national scale has been confirmed on the ruAA+ level. The agency's analysts note that the reasonable tax policy and improving debt management system make it impossible to return to a large budget deficit even in case of cuts in oil prices. The new management of the Central Bank of Russia has promoted banking reform. Still, S&P does not intend to upgrade the ratings of RF any further due to forthcoming parliamentary elections in late summer and the related slowing down of structural economic reforms.

On 17 December, Moody's Investors Service also upgraded Russian foreign currency liabilities from Ba3 to Ba2. The revision was based on the assessment of Russia's financial and macroeconomic indicators and on the data about on-going structural reforms, in particular, the reforms of natural monopolies.

Situation in International Currency Markets In contrast to the Russian market, the situation in the largest international markets was not as favourable. Following 11 September, a series of corporate scandals related to forged financial reporting by leading US companies swept over the USA, which affected investor confidence negatively.

By early July Dow Jones and NASDAQ fell below 8000 and 1300, respectively. At the end of June, pressed by negative news from international markets, quotations of Russian shares that had been demonstrating enviable stability throughout the period also experienced a sharp drop. Some European indices fell to 1997 levels. In order to stabilise the situation, the two Chambers of the US Congress approved a new law aimed at fighting corporate fraud. Investors have found this news, and positive financial reports of a number of large corporations, such as 3M, McDonald's, DuPont, very positive. On 24 July, the closing values of the leading indices grew sharply: the Dow increased 6.4 percent; NASDAQ grew 5 percent, and S&P's grew 5.7 percent.

INSTITUTE FOR THE ECONOMY IN TRNSITION http://www.iet.ru 160% Dow Jones Industrial Average 150% Nasdaq Composite RTS Index 140% 130% 120% 110% 100% 90% 80% 70% 60% 50% 26.04.200 14.08.02 09.10.02 22.05.02 17.07.200 11.09.02 06.11.02 30.12.Fig. However, the player's optimism did not last long, and a recession on the largest international trade floors continued until the first half of October. DJ's resulting values in Quarter were the weakest since 1987 (-17 percent), and NASDAQ lost cca. 20 percent. In the course of the trade session on 9 October the Dow fell to the level of 1997 (7286.27), and NASDAQ, to the level of 1996 (1114.11). Such dynamics resulted from negative corporate news and the uncertainty in respect of military actions against Iraq. However, by the end of the month the US stock indices partially regained the lost positions. By 23 October DJ and NASDAQ had grown to 8494,27 (+16.6 percent growth from the minimum level) and 1320.23 (+18.5 percent), respectively. On the whole, DJ grew 11.89 percent and NASDAQ 12.64 percent during the month. The increase in asset quotation was above all brought about by positive financial reports by the largest corporations. E.g., the performance of Yahoo!, the insurance company Aetna, IBM, Microsoft and Citicorp exceeded experts' forecast and General Electric, the world's capitalisation leader, completed the quarter according to the experts' expectations.

Performance of the largest companies was better than the respective forecast, which allows to assume that the period of recession in corporate revenues is nearing its end.

Despite the alarming situation in the US economy, the US Federal Reserve has kept its interest rate at 1.75% in the course of almost the entire year; only on 6 November the US did the Fed Open Market Committee announce a reduction of the discount rate by 50 percentage points at one stroke (forecast: 25 points). On the one hand, the US Fed's management admitted that its previous steps aimed at bringing the economy out of the recession were not efficient enough, but, on the other hand, it demonstrated its determination to bring the economy out of the crisis by any available means. The US stock market reacted by increasing stock indices because a reduction of the discount rate will lead to growing consumption and invest RUSSIAN ECONOMY in trends and outlooks ment volumes. Moreover, good reports of HP and General Electric also influenced the growth of the US indices. As at 22 November DJIA grew more than 20 percent compared to the historic minimum of 09 October, and NASDAQ, more than 31 percent. However, by the end of the year DJIA and NASDAQ had again dropped, reaching by 31 December 8341.63 and 1335.51 points, respectively.

In December 2002, the European Central Bank, for the first time since November 2001, lowered the discount rate 0.5 percent to the level of 2.75 percent. The US Fed left the key rate at 1.25 percent the lowest level in the past 41 years. In its statement the FOMC noted that the risk of inflation increase and the risk of a further weakening of the economy are equally possible. The Bank of England has also decided to leave the discount rate unchanged at the level of 4 percent.

In Asia the situation in stock markets could not fill one with optimism, either. The growth in problem loans in Japan poses a real threat of bankruptcy for many large credit institutions. The value of NIKKEI-225 fell to its 19-year minimum.

The Market for Term Contracts On 19 September, 2002, a year passed since the beginning of trade in the FORTS market for term contracts. During the period, turnover in this segment of the stock market exceeded RUR 70 billion; market participants concluded cca. 420 thousand deals and the monthly growth rate of trade volume was cca. 30 percent.

On the whole, in 2002 participants of the term contract market concluded 546 thousand deals for RUR 94.9 billion (22 million contracts). The average daily volume of trade increased 3.45 times compared to 2001up to RUR 378 million, or 3.1 times in terms of concluded contracts, which amounts to 87.5 thousand contracts per day. Activity of the participants almost tripled, growing to 2168 deals per day, compared to 746 deals in 2001. At the end of the period, on 31 December, the total open positions on standard contracts reached RUR 1.191 billion, or 292 thousand contracts, growing 2.3 times in Rouble terms and 3.times in contract terms (as at 29 December, 2001: RUR 514 million and 83 thousand contracts).

By the end of 2002 the FORTS market had reached new levels. On 26 November the trade volume was RUR 795.47 million (188.5 thousand contracts, 3785 deals), which is the highest figure in the market's history.

On 16 September, 2002, September futures contracts totalling cca. RUR 194 million were executed. The highest execution volume in the floor's history, RUR 74.98 million, was registered on the futures contract on the price of OAO Lukoil shares.

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