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S. Drobyshevski Financial markets The Market for Government Securities In February 2003 a substantial growth of quotations for Russian Eurobonds and Minfin bonds was observed. The quotations for the most of securities reached their historical maximum. Such factors as high oil prices, a substantial growth of gold and currency reserves, a favorable economical and political situation in Russia and positive development prospects determined investor interest in Russian bonds. News about the establishment of a joint venture between British Petroleum and the Russian TNK resulted in substantial increase in prices for Russian debts. The establishment of the new joint company is an evidence of positive changes in foreign investors interest in Russian economy. The successful placement of Gazprom bonds has also made its favorable effect on Russian Eurobond prices. The following bonds should be named among the growth leaders: Minfin, the 7th tranche (5.33 percent), Minfin, the 5th tranche (3.17 percent), RUS-28 (6.percent), RUS-18 (5.70 percent), RUS-30 (3.97 percent).

The RF Ministry of Finance made external debt payments in the amount of US$ 1.99 billion in February.

The RF Ministry of Finance reported that the exchange of the second tranche of the former USSR commercial debt is scheduled for May-July. In December 2002, the first tranche of this debt was exchanged for the additional RF Eurobond issue with maturities in 2010 and 2030. The commercial debt of the former . . 1-7.7.9-15.9.2-8.12.15-21.7.12-18.8.23-29.9.7-13.10.4-10.11.29.7-4.8.26.8-1.9.21-27.10.18-24.11.16-22.12.13-19.01.10-16.02.27.01-2.02.30.12.02-5.01.USSR in the amount of US$ 200-400 billion can be offered for exchange within the second tranche. At the same time, the RF Ministry of Finance would prefer that the largest possible volume of the remaining debt be exchanged in the second tranche.

2002 - 2003 9,5% 4 5 6 8,5% 7,5% 6,5% 5,5% 4,5% 3,5% 2,5% FIGURE 1. YIELD TO MATURITY OF MINFIN BONDS IN NOVEMBER 2002 FEBRUARY 2003.

2003, 2007 2028 . 2002 - 2003 10,5% 9,5% 8,5% 7,5% 6,5% 5,5% 4,5% 3,5% 2,5% 1,5% USD-2003 USD-2007 USD-FIGURE 2. YIELD TO MATURITY OF RUSSIAN EUROBONDS MATURING IN 2003, AND 2008 IN NOVEMBER 2002 - FEBRUARY 2003.

01.11.13.11.21.11.29.11.09.12.19.12.10.01.20.01.28.01.05.02.13.02.21.02.01.11.13.11.21.11.29.11.09.12.19.12.10.01.20.01.28.01.05.02.13.02.21.02.A sudden increase in market players' activity was observed during this month at the GKO-OFZ secondary market, which was caused by the free Rouble liquidity, as well as by statements of Central Bank representatives on the leveling strategy of internal and external market yields. Additional Rouble funds in the amount exceeding RUR 106 billion entered the market as a result of coupon payments and OFZ-FD issue redemption. On February 05 the Ministry of Finance issued a security with the longest term: OFZ 46002 with maturity in 2012. The placement of this issue gathered a record number of market participant orders: nearly RUR 21 billion, while the stated volume was RUR 11 billion. The yield of long-term OFZs dropped below 12 percent p.a. During the first week of February the yield of all government bonds decreased by 1 percent on average, which resulted in the similar yield decrease in sub-federal and corporate debt sectors. From the 3rd until the 7th of February the turnover in the Rouble bond market amounted to ca. RUR 16 billion. During the second week of February, having risen in price by more than 6 percent, the bonds of series 46002 became quotation growth leaders and provided the investors with a weekly income equal to 330 percent p.a. The market participants made 297 deals to the amount of RUR 2.1 billion with these securities, though the share of additional placement by the Ministry of Finance was only 9 percent of this amount. Altogether, during the week, the yield on these government securities amounted to ca. 72 percent p.a. The trade turnover reached RUR 12.7 billion from the 13th until the 17th of January. The total trade volume in Rouble government bonds doubled in February as compared to January, and amounted to RUR billion.

Totally, on the 25th of February the nominal volume of GKO-OFZ amounted to RUR 246.906 billion, the money volume: RUR 259.054 billion, and the duration of market portfolio: 673.58 days.

The Market for Corporate Securities The Stock Market.

In February the Russian corporate securities market demonstrated the long-expected growth. Adoption of a block of significant laws on reforms in power industry, large investments into the Russian company TNK made by British Petroleum, successful placement of Gazprom Eurobonds, as well as some other internal corporate news were the reason for the increase in the cost of Russian assets. The external news was mainly negative. The unsteady situation on the leading world trade floors was conditioned by political instability.

The continued US - Iraq, as well as the US - North Korean conflicts make investors choose investment objects with greater caution and seek for more secure ways of investing funds.

At the end of the month, the RTS index increased greatly (9.43 percent), amounting to 378.14 points on February. The trade volume also increased as compared to the previous month and amounted to US$ million. The average annual volume amounted to $14.7 million. The RTS index dynamics can be subdivided into four periods: from the beginning of the month until 6 February the index was at the level of 347 points.

Then the stock index started to rise sharply and reached 370.71 points (7.38 percent) by 11 February. Market players' growing interest in Russian assets was caused by the adoption in the 2nd hearing of a block of laws on reforms in the power industry, news on large BP investments into TNK, and Yukos' publications about positive financial results. After that and until 20 February the stock index fluctuated between 368 and points, and at the end of the month again increased up to 378.14 points (2 percent), which was conditioned by the adoption in the 3rd hearing of a block of laws on reforms in the power industry and a successful placement of ten-year Gazprom bonds. The minimum turnover was registered on 17 February, $6.8 million, the maximum turnover was $26.1 million (11 February).

During the period under review the most of Russian blue chips demonstrated positive dynamics. As of February the growth leaders were Mosenergo securities (12.05 percent), followed by Rostelecom stock (15.percent), RAO UES (14.66 percent) and Yukos (14.01 percent). More moderate increase in prices was observed for the following shares: Gazprom (13 percent), Sberbank (11.02 percent), Tatneft (10.56 percent) and Sibneft (10,42 percent). In the outsider group in February were Surgutneftegaz (6.21 percent), MMC Norilsk Nickel (2.74 percent) and Lukoil (1.61 percent). Such dynamics of Lukoil stock was conditioned by financial results of the companys activity, which turned out to be worse than investors had expected.

The proportion of RAO UES common stock in the total RTS trade volume in the considered period was maximal: 30.43 percent (28.18 percent in the previous month, correspondingly). These are followed by Yukos securities: their volume doubled and reached 16.44 percent (8.66 percent). The share of Lukoil common stock decreased up to 15.47 percent (18.59 percent); Surgutneftegaz: 7.69 percent (11.65 percent);

MMC Norilsk Nickel: 5.53 percent (12.47 percent). The total proportion of the five most liquid stocks in the overall RTS February turnover slightly decreased, reaching 75.56 percent (79.55 percent in January).

($) FIGURE 3.

31 2003 . 25 2003 .

20% 15% 10% 5% 0% (%) FIGURE In the period from 1 until 25 February 2003, the volume of trade in Gazprom stock via RTS terminals more than doubled as compared to January and amounted to US$ 84.8 million (ca. 107.3 million shares); a total of 10.5 thousand deals were concluded with the company's securities. At the end of February the five . 3 2 1 4 1 26 23 21 18 20 29 19 17 31 29 most capitalized Russian companies were as follows: Yukos: US$ 23.7 billion; Gazprom: US$ 19.2 billion;

Lukoil: US$ 12.4 billion; Surgutneftegas: US$ 11.4 billion; and Sibneft: US$ 10.2 billion (all data according to RTS).

The Market for Term Contracts.

In February the FORTS market grew to new historic highs: on 19 February a record trade volume in open positions was observed: 393.7 thousand contracts (among them, the futures contracts fall at 342 thousand and options fall at 51.7 thousand) for the total of RUR 1.721 billion, which exceeds the maximal index as at January 13, 2003, by 13 percent. The total turnover in term contracts practically did not change within the period from 1 until 25 February as compared to the similar period in the previous month and amounted to RUR 7.74 billion (45.3 thousand deals, 1.84 million contracts); futures contracts accounted for RUR 7.billion (43.3 thousand deals, 1.84 million contracts) in that amount. The average daily trade volume was RUR 515.7 million, the number of deals: 3021.

Corporate bonds.

The decline of US$ rate and excess of short-term liquidity resulted in sharp quotation growth of Rouble instruments, including corporate bonds. This market segment experienced a sharp rise in trade turnover and quotation growth. For example, the average yield on corporate bonds was nearly 70 percent p.a. within the period from 10 until 14 February. For the first three weeks of February the turnover in corporate bonds amounted to RUR 9.19 billion. The following securities are in the highest demand on the secondary market:

TNK 5v1t (RUR 685 million), Gazprom-2 (RUR 470 million), Gazprom (RUR 383 million), TNK 5v1t (RUR 215 million) and IRKUT-2 (RUR 152 million). The following initial placements in February are noteworthy: the 3rd series of MGTS bonds (RUR 1 billion), VolgaTelecom (RUR 1 billion), OAO Mechel (RUR 1 billion), Salavatnefteorgsintez (RUR 300 million).

External Factors of the Russian Stock Market Dynamics.

On the whole, black gold prices have increased by more than 7 percent during the month. As of February the price for one barrel of Brent crude oil amounted to $33.63. The substantial reduction in Venezuela crude oil deliveries, the expectations of the forthcoming war in the Persian Gulf and the lowest ever industry oil reserves in the USA for the last 28 years resulted in futures price exceeding the level of US$ 33 / barrel for Brent oil (March) (IPE, London) on 13 February, up to US$ 33.06 / barrel, which became a new record maximum since November 27, 2000. The information about a strike of oil industry workers in Nigeria and fears of possible reductions in oil deliveries from this country contributed to oil quotation growth on 18 February. On the other hand, it should be noted that the long-term strike in Venezuela stopped and oil production gradually recovered. OPEC increased oil production by 1.5 million barrels per day from 01 February.

Brent, (NYMEX) FIGURE 5. PRICE FOR BRENT CRUDE OIL, USA (NYMEX) ....2.3.4.5.7.7.9.0.2.

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23.25.In its regular meeting, the US Fed Open Market Commission decided to keep the federal funds key interest rate on the same level of 1.25 percent. For the first time since November, 2001, the Bank of England decreased its interest rate by 0.25 percent up to the lowest level since 1995: 3.75 percent, which, according to the Bank's Monetary Policy Committee, shows increasing concerns about growth rates in the European and the world economies on the whole.

200% Dow Jones Industrial Average Nasdaq Composite 180% 160% 140% 120% 100% 80% 60% 40% FIGURE 6.

Corporate News OAO VolgaTelecom Standard & Poors upgraded the long-term credit rating of OAO VolgaTelecom from "B-" up to "B". The reason for the upgrading was the completion of consolidation of fixed communications operators in the Volga region, which resulted in improvement of VolgaTelecom market position and the companys business indicators. S&Ps analysts specify that the new company, with an income of nearly US$ 345 million in 2002, will get additional advantages from its increased activity, economies of scale, stronger market positions and easier access to capital market. Therefore, OAO VolgaTelecom has become the most reliable communication regional operator, according to the S&P rating.

OAO TNK On February 11, TNK (the Tyumen Oil Company) and BP announced the greatest deal in the history of the domestic business. The TNK assets were pooled with the Russian assets of BP, the world's third-largest oil production company. Everyday oil production volume of the new holding will amount to 1.2 million barrels, and proven oil reserves are 9.5 billion barrels. Thus, the newly formed holding will join the third biggest oil and gas companies of the country.

BP will pay US$ 3 billion for the 50 percent share in the united entity and, additionally, will transfer shares in the amount of more than US$ 3.75 billion. The amount of the deal shows that western investors are ready to pay a higher price for the assets Russian oil companies: one barrel of the new holding's reserves was assessed at US$ 3, whereas other domestic oil companies prices for one barrel are US$ 1- US$2.

OAO Gazprom Gazprom published its IAS financial activity results in the Quarter 3, 2002. The consolidated revenues amounted to US$ 4.05 billion, that is 2 percent higher as compared to last year's corresponding index. The net gains adjusted for income from inflation and deferred taxation amounted to US$ 691 million.

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