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A moderate growth of the most liquid bonds was observed in the corporate bond sector during the first week of the month beside improvements in liquidity in the banking sector. A decrease was noted only due to the fall of Russian Eurobonds against the background of terrorist acts and hostage taking at Beslan. The general picture of the entire secondary market was deteriorated by the outcome of the auctions on Moscow bonds offering. Positive impact could be achieved subject to participation of a great number of investors, thus adding a premium to the market rates. However, the demand of major participants, which almost doubled the supply, led to a discount to the secondary market. Such an aggressive conditions could hardly attract small and medium investors. Then, the situation in the corporate bond market was characterized by a significant decrease in rates due to a notable reduction of new offerings. Interest rates in the sector of corporate and regional debt instruments grew poorly throughout the entire week. The market was supported by (1) a significant growth of the US government bonds, and (2) normalized ruble liquidity in the banking system. In the second half of the month was characterized by correction which started in the previous week and gave way to growth by the end of the month against increased demand for long issues of the leading echelon as well as a number of the second echelon securities. This was due to a new inflation data, whereof it was clear that it would be difficult for the Central Bank of Russia to simultaneously achieve the inflation target ( 10% ) and the stronger ruble goal ( 7% ). Some increase in the USD exchange rate might have been considered by investors as a signal that the Central Bank of Russia had decided in favor of inflation and not to increase the currency rate. This made speculators close positions in the foreign exchange market and switch to long bonds. However, the Central Bank of Russia proceeded maintaining the exchange rate at the level between 29.21 and 22 rubles, which made investors less optimistic and led to correction in the market in the absence of fundamental factors.

In the period between September 1 and 28, the price index of the corporate bonds traded in the MICEX8 grew by 0.71 points ( 0.65% ), while the index of the ten most liquid bonds of the corporate sector grew by 0.81 points (0.81%). Over the period between September 1 and 24, the total turnover of the MICEX bond section amounted to nearly 5 bln rubles with the average daily turnover being ml rubles, which is significantly lower than the figures of August this year.

The calculation was based on the indices of corporate bonds traded in the MICEX, which are computed by Zenit bank.

FIGURE Dynamics of corporate bond indices ZETBI-Corp ZETBI-CorpExternal factors effecting movement in the Russian Stock Market.

In September, the global oil market was dominated by an upward trend with a new absolute historical maximum. At the beginning of the month, the trend was supported by unstable situation in Iraq:

hardly had the northern Iraqi oil pipe-line functioned over a few days after repairs when another subversive destruction took place. The market was supported by the data on fuel reserves in the United States, according to which the crude oil reserves of country were reduced significantly. The news about YUKOS continued a positive effect on the prices: again it was most likely that YUKOS would stop its operating activities after its subsidiaries accounts had been arrested as well as tax claims increased. Another major factor of oil price rise became the Ivan hurricane that took place in the Caribbean zone. In spite of the fact that the aftereffects appeared to be less destructive for the oil industry, several oil refineries at Louisiana and Mississippi were closed. According to the data of the US natural resources service, production of oil products was reduced by 5.2 million barrels due to the protective measures. The tendency for a reduction of oil products reserves continued as well. The increase in OPECs quotas by 1 million barrels daily up to 27 million barrels had no impact whatsoever on the prices because the current production of the cartel has reached its maximum capacity of over 28 million barrels daily. The market was supported by a decision of YUKOS to reduce export volume to China by railway transportation.

Quite an opposite trends were observed in the global stock markets in September ( refer to Table ). In the beginning of the month, the American stock indices had a differently directed movement against a very small trading volume and high volatility. The prices were supported positively by a relatively low yield of the government bonds and strengthened position of the incumbent president in the electoral campaign, while the negative impact was represented by ceased correction of oil prices, negative forecast for corporate financial performance, cooling of the economy, light trading of stocks and short-term technical outbid. All in all, economic statistical data were of negative character. Then, a slight growth of indices was observed against contradicting corporate and general business news.

The speech made by A. Greenspan at the Budgetary Committee of the House of Representatives proved the opinion that the US economy is suffering a decline in growth rates along with other serious current problems ( sizeable budget deficit and unemployment problems ). Stock indices in the Ameri 01.07.17.07.04.08.20.08.05.09.23.09.09.10.27.10.13.11.01.12.18.12.09.01.27.01.12.02.03.03.22.03.07.04.23.04.14.05.01.06.18.06.06.07.22.07.09.08.25.08.10.09.28.09.can stock market were falling towards to the end of the month, which was conditioned mainly by high oil prices and prevailing negative outcome in the corporate sector of the economy.

FIGURE 6.

190% Dow Jones Industrial Average Nasdaq Composite 170% The RTS Index 150% 130% 110% 90% 70% In general, it should be noted that global oil prices, which had reached new historical maximums, had a significant impact on the movement of the Russian stock market against a neutral trend in the global stock markets. The growth of oil companies stocks was hauling the entire market.

Corporate news.

LUKOIL oil company On September 27, the company published its consolidated financial statement for three and six months of 2004 drawn in accordance with the US GAAP. Net profit in the first half of 2004 amounted to 1696 ml US dollars, which is 594 ml US dollars more than that in the comparable period of the previous year. Operating expenses of the company in the first half of 2004 decreased by 27 ml US dollars ( 2% ) as compared to the similar period of 2003.

Sibneft On September 22, the company published its full consolidated financial statement prepared in accordance with US GAAP for the first half of 2004. Total business earnings of the company in the first half of 2004 amounted to 4014 ml US dollars as compared to 3438 ml US dollars in the comparable period of 2003 ( 17% growth ). Net profit in the first half of 2004 amounted to 992 ml US dollars, which is 29% less than the comparable figure of 2003 ( 1380 ml US dollars ) when Sibneft gained income from selling its share in ONAKO/Orenburgneft. Net profit decreased by 2% without regard of this income.

Gazprom On September 14, it was stated that the Government of Russia had offered an option of increasing the government share in the Gazprom authorized capital. The increase will result from transfer of shares to the state-owned Rosneft, which is going to be a 100% subsidiary of Gazprom.

31.07.20.08.09.09.29.09.19.10.08.11.28.11.18.12.07.01.27.01.16.02.07.03.27.03.16.04.06.05.26.05.15.06.05.07.25.07.14.08.03.09.23.09.GMK Norilsky Nikel GMK Norilsky Nikel appointed investment banks Citigroup and Morgan Stanley as joint leadmanagers of the planned debut Eurobonds issue nominated in US dollars, which was placed on September 17 to the amount of 500 ml US dollars with the yield of 7.125% and maturity date on September 30, 2009. The demand for issue was 4 times higher than the supply. The Eurobonds will be unconditionally and irrevocably secured by GMK Norilsky Nikel.

In September, the company published for the first time its interim financial statement for the first quarter of 2004 prepared in accordance with the International Accounting Standards. According to the financial statement, the sales revenue over the period under review increased by 40% as compared to the similar period of 2003 amounted to 1583 ml US dollars. Net profit in the first quarter of amounted to 460 ml US dollars, which corresponds the 322% growth as compared to the similar period of 2003.

YUKOS On September 20, the company published a statement saying that from September 28 the company would temporally suspend a part of direct export delivery to the Peoples Republic of China to the amount of 1 million tons till the end of 2004. The suspension is caused by impossibility of further preexport financing of oil delivery to the Chinese National Oil Corporation. Under the circumstances YUKOS plans to redirect the current export volumes to other directions of crude sales, rather than reduce oil production.

Table 1.

Global Stock Indices Movement Changes per Changes since the Data as of September 28, 2004 Value month (%)9 beginning of the year (%) 629.14 9.36% 7.35% RTS ( Russia ) 10077.4 -0.45% -3.19% Dow Jones Industrial Average ( USA ) 1869.87 1.82% -6.82% Nasdaq Composite ( USA ) 1110.87 0.99% 0.14% S&P 500 ( USA ) 4567.3 1.72% 1.27% FTSE 100 ( Great Britain ) 3882.27 1.13% -3.39% DAX-30 ( Germany ) 3667.47 0.85% 1.96% CAC-40 ( France ) 5499.7 0.93% -1.49% Swiss Market ( Switzerland ) 10815.57 -3.30% -0.09% Nikkei-225 ( Japan ) 23231.0 1.58% 3.50% Bovespa ( Brasil ) 10843.42 6.31% 33.57% IPC ( Mexico ) 1687.82 3.95% 13.69% IPSA ( Chile ) 1979.1 3.87% 10.48% Straits Times ( Singpore ) 832.1 3.34% 1.32% Seoul Composite ( South Korea ) 22293.78 12.28% 16.43% ISE National-100 ( Turkey ) 460.5 4.94% 3.92% Morgan Stanley Emerging Markets Free Index Foreign Exchange Market.

The US dollar got stronger in the beginning of the month. Temporal US dollar growth in the global foreign exchange market played against the ruble. In addition, certain inflation expectations remained In respect to the levels of August 30.

in the Russian market. On the other hand, the Russian currency was supported by stable inflow of currency earnings due to a very high oil prices. Then, the US dollar stabilized at the level of 29.22 rubles for 1 US dollar. The market showed a moderate activity. In the second half of the month, the US dollar remained relatively stable varying at the level of nearly 29.215 rubles for 1 US dollar. Quiet market was governed by the USD/EURO ratio stabilized at 1,21 to 1,22 US dollars for 1 Euro in the global market. At present, the Russian market is receiving export contracts earnings with high oil prices of the summer period. Large-scale sales of export earnings encouraged turnover growth in the foreign exchange market.

In the period between September 1 and 29, the USD exchange rate fell by 0.04 rubles (-0.15%) and amounted to 29.215 rubles for 1 US dollar. Total turnover on the US dollar in the SELT over the period between September 1 and 24 amounted to nearly 13.7 bln US dollars, average daily turnover over this period amounted to 762 ml US dollars, which is comparable with the figures of August this year.

The maximum trading volume on the US dollar over the period was recorded on September 13, which amounted to nearly 1828 ml US dollars, while the minimum volume was 285 ml US dollars on September 6.

Ruble liquidity in the banking sector increased slightly in September 2004 as compared to the previous month: average balance in corresponding accounts of credit organizations with the Bank of Russia amounted to 197.5 bln rubles in September against 194.3 bln rubles in August.

FIGURE 7.

Dynamics of the Official USD/RUR and EUR/RUR Exchange Rates in 2003-40.Official USD/RUR exchange rate 39.Official EUR/RUR exchange rate 38.37.36.35.34.33.32.31.30.29.28.In the beginning of the month, the EUR/USD exchange rate remained unchanged in the global foreign exchange market, though it jumped due to negative data on industry and consumer uncertainty in the United States, and even slumped after the report on unemployment. Then, the EURO strengthened signigficantly against the US dollar. The US currency became weaker due to the comments made by . Greenspan with regard to low inflation, as well as his actual acknowledgment of economic cooling, which reduced the yield of the US government bonds and encouraged the Euro growth. Towards the end of the month, the market experienced a smooth strengthening of the Euro versus the US dollar against the background of investors confidence in slowed-down economic growth rates in the United States and lower risk of interest rate growth. The all-time high level of deficit of US current accounts doesnt allow for significant changes in the power balance in favor of the US dollar.

roubles 02.09.02.10.01.11.01.12.31.12.30.01.29.02.30.03.29.04.29.05.28.06.28.07.27.08.26.09.In the period between September 1 and 29, Euro exchange rate grew in the global market by $0.( 1.15% ) and reached 1.2319 US dollars for 1 Euro. The EUR/RUR exchange rate movement depended largely on the global market trend. Over the period between September 1 and 29, EUR/RUR exchange rate grew by 0.53 rubles ( 1.51% ) from 35.37 to 35.90 rubles for 1 Euro. Total turnover on Euro in the SELT from 1 to 24 September amounted to 141.4 ml Euros with average daily figure being nearly 7.86 ml Euros. The maximum trading volume on the Euro over the given period was recorded on September 7, which amounted to 13.76 ml Euros, while the minimum volume was 5.94 ml Euros on September 10.

FIGURE 8.

Dynamics of the Dollar/Euro Exchange Rate on the International Markets 1.1.1.1.1.1.Table 2.

Financial Markets Indices Month May June July August Sep.

Monthly inflation 0,7% 0,8% 0,9% 0,4% 0,4% Estimated annual inflation according to current 8,73% 10,03% 11,35% 4,91% 4,9% month trend Refinancing rate of the Central Bank of Russia 14% 13% 13% 13% 13% OFZ average yield to maturity for all issues ( % per 7,04% 6,48% 6,45% % year ) GKO-OFZ monthly market turnover ( bln rubles ) 19,67 12,03 6, yield to maturity at the end of the month (% per year):

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