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Monetary and budgetary spheres The fanfares subsided in mid April, however. The fall in the market started after the arrest of YUKOS assets and the consequent S&Ps decision to decrease the companys rating. The information that the government was considering the possibility of acquisition of the generating companies stock not only in exchange for RAO UES Russias stock, but also for cashcontributed to the sharp turn of the upward trend as well. As a result, by July the RTS index slid to its 2004 minimum value (518.15 points), minus 33.7% (263.points) vs. its peak value of 12 April. Between May through July the trading volume was de clining affected by the summer idleness actor: given that between May to June the vol ume of trades on the stock used to compute the RTS index remained roughly at the average level (USD 419 and 482 mln., respectively), in July it slid to some 368 mln.

Notably, the volatility of the stock market was growing between May through July.

While in May it was explained by the deterioration of the cash liquidity in the banking sector that had been supporting the marlet over the first four months of the year. June was full of news associated with YUKOS, and any input often resulted in considerable fluctuations of quotations of both YUKOSs and even the most liquid papers. For instance, in June, Mr.

Putin made a statement that the government was not keen to see such a company as YUKOS go bankrupt. The statement triggered a avalanche like rise in demand for all blue chips and caused a local upward adjustment of the market as a whole. However, the nerv ousness present in the banking sector in July prevented the positive dynamics and shortly afterwards caused the restoration of the overall negative trend on the market. In July, the domestic market displayed an extremely negative reaction to the statement issued by rep resentatives of the RF Ministry of Justice on a possibility to sell Yuganskneftegas to cover the companys tax arrears.

The next stage of the dynamics of the 2004 national stock market was formed by the rise in quotations between early August through mid October, with the RTS index growing by 172.37 points, or at 33,27% vs. its value of 28 July. The growth was taking place under rather a low investor activity. More specifically, in August and September the volume of trades on the papers that are included in the listing to compute the RTS index accounted for USD 277 and 262, respectively, which is roughly 1.61.7 times down vis a vis the average monthly value (some USD 442 mln.). However, in October, after the holiday sea son was over, the investor activity was back to the normal level and the trading volume in RTS on the stock used for computation of its index accounted for USD 470 mln.

In that period, the stock prices found themselves under the impact of a whole range of favorable and unfavorable factors. While a substantial price rise for oil was notably back ing up the quotations of the national oil companies stock in August and the subsequent months, September in turn proved to be full of favorable corporate news: the process of making key decisions in the electricity reform area was re galvanized, which generated a notable price rise of the energy companies papers, primarily those of RAO UES Russia and OAO Moseenergo; the auction on the sale of a government package in LUKOIL be came a success, with victorious ConocoPhilips announcing its readiness to increase its share in the company up to 20%. Against such a background, the YUKOS case began to exert a far lesser influence on the market not because investors grew immune to nega tive news, but the companys stock lost a great deal of weight in the stock market index to stir it up. The only short term negative effect on the stock market is September was caused by the information of some MP=s appeal to the General Attorneys office about the necessity to investigate into gray schemes non residents use to purchase the com panys papers.

The announcement issued by the RF Ministry of Justice on a USD 10.4 bln. worth appraisal of Yuganskneftegas, which proved to fall far below the market expectations, RUSSIAN ECONOMY in trends and outlooks formed a signal to the break of the upward trend and the start of the stage of consolidation.

The market dynamics were moderate until mid November, while the RTS index was fluctu ating between 640 to 670 points and investors activity was at a level slightly below the av erage one. Thus, the monthly volume of trades on the stock that form the listing to com pute the RTS index amounted roughly to USD 350 mln.

During the last one and a half months of 2004 the stock market saw a downfall in prices for traded papers, followed by a slight adjustment. More specifically, between November through 10 December 2004, the RTS index fell by 136.35 points from 681.down to 545.52 points, or roughly by 20%. After some restoration of earlier lost positions, the pretext for a regular fall was formed by the statement of the RF Ministry of Justice on setting 19 December as the date of the auction on the sale of Yuganskneftegas. Plus, the tax authorities produced new claims to the company worth USD 9 bln. in backtaxes. Since that moment YUKOS aggregate tax debts made up USD 14 bln. Furthermore, the fall of the market accelerated following the governments decision to postpone the date of the dis cussion of the electricity reform and take the issue of privatization of generating compa nies away from the agenda, which de facto evidenced the government was not ready to sell generating capacities. Interestingly, the fall was taking place against a sufficient inves tor activity: the volume of trades over the period in question (18 November 10 December 2004) accounted for some USD 406 mln., which was slightly lower than the average monthly index.

During the last three weeks in December (1131 December) the RTS index grew by 68.59 points up to 614.11 points. Some fall of the index was noted immediately in the wake of the auction on Yuganskneftegas formally won by the obscure Baikalfinansgroup.

The uncertainty vanished by the end of that week, nonetheless, when it became known that Rosneft in turn had taken over the dark horse. In the aftermath of the scheme the investor activity fell notably, and the 2004 trading sessions finished against the background of a slight adjustment which enabled the RTS index to end the year in a positive area.

100% 75% 50% 25% 0% -25% -50% -75% -100% Price change (%) Source: the RTS Exchange Fig.21. The Dynamics of Quotations of Blue Chips by Results of RAO RAO UES LUKoil Mosenergo YUKOS Sberbank SIBNEFT Norilsk Nickel Tatneft Rostelekom Surgutneftegas Section 2.

Monetary and budgetary spheres By contrast to 2003, when all the blue chips enjoyed a notable rise in quotations, overall 2004 became a year of a relatively stable quotations (Fig. 21). It was investment in OAO Mosenergo stock that proved to be most profitable in 2004, with the rate of return of 117.52 (114.79 in 2003), followed by OAO Sberbank of Russia 83.46% (37.43%), while the stock of OAO Tatneft, OAO LUKOIL and OAO Surgutnetegas lagging far behind them 32.31% (44.2), 24.39% (49.07%) and 21.95% (81.4%), respectively. At the bottom of the positive area was OAO Sibneft whose stock quotations grew by meager 4.11% (vs. 28.in 2003). RAO UES Russia demonstrated the least rate of fall in quotations in 2004 1.72% (+112.36% in 20030, followed by OAO Rostelecom and OAO Norilsk Nickel 13.27% (+66.67%) and 18.67% (+ 220.38%). As far as the downfall in stock quotations is con cerned, the unquestionable leader became the disgraced YUKOS whose stock lost 93.82% (+14.89% in 2003), which turned once the most attractive Russian blue chip into a clear looser.

As concerns companies of the second echelon, the maximum increment in their 2004 stock quotations was demonstrated by OAO Verkhnesaldinsly Mettalurgicheskoye Obyedineniye (336.99%), Zhiguly Power Plant (250.0%) and Zeyskaya Power Plant (225.93%), while the market was treating these papers with caution anyway. There were less than 50 transactions involving energy companies (except for the leader), while deals were stricken with the OAO Verkhnesaldinsly Mettalurgicheskoye Obyedineniye pa pers. It should be noted, however, out of the top 10 companies by rise in stock quotations 5 ones represent the electricity sector.

RAO UES Russia stock once again kept their leading position in terms of the volume of turnover at RTS. By the 2004 results, their share accounted roughly for 25.86% vs.

30.23% in 2003. LUKOILs share grew from 17.87% in 2003 up to 21.2% in 2004, followed by Norilsk Nickel (10.55% vs. 4.74% in 2003) and Surgutneftegas (6.14% vs. 10.23% in 2003). So, the overall proportion of transactions at RTS involving the noted five issuers stock accounted for 72.44% vs. 77.35% in 2003.

As of December 31, 2004, the top five companies by the volume of capitalization com prised: Surgutnetegas worth USD 26.65 bln. (vs. 20.76 bln. in 2003), LUKOIL 26.01 bln.

(19.77 bln.), Sibneft 14.22 bln. (13.5 bln.), Norilsk Nickel 11.87 bln. (13.94 bln.), RAO UES Russia 11.7 bln. (11.45 bln.). So, the 2004 list of leading companies somewhat changed vs. 2003. Thus, Surgutneftegas held the 2nd position in the 2003 list after YUKOS. It important to note that three out of five leaders in terms of capitalization represent the oil and gas sec tor33, while in 2003 there were four of them. Such a stable position of mineral companies by capitalization was determined by a favorable situation on mineral markets in 2004. Plus, after holding the 6th position in 2003, RAO UES Russia entered the noted top five list, which can be explained by a successful promotion of the electricity sector reform, which encouraged in vestor demand for the companys stock. As concerns companies of the non mineral sector, it is Sberbank of Russia that likewise in 2003 once again had the greatest capitalization in 2004: as of end of the year it reached USD 9.33 bln. (vs. 4.99 bln. in 2003).

The Market for Forward Contracts The market for forward contracts, alias FORTS aged 3.5 years in December 2004.

The turnover on the market has been growing substantially from year to year and 2004 did not make an exception. According to the annual results, in 2004 the aggregate turnover of trading with futures and options accounted for a. Rb. 336.37 bln. vs. 214 bln. reported in 2003. In other words over 2004 alone FORTS grew practically 1.5 times. The participants in The capitalization of RAO Gasporm is not considered in the present review, as there are no official data on the company.

RUSSIAN ECONOMY in trends and outlooks the market concluded a. 1.5 mln. deals, which made up a. 41.5 mln. contracts (vs. 901,deals and 34 mln. contracts in 2003). Thus, the above figures evidence a notable rise in investor activity in this particular sector of the stock market. The aggregate volume of open positions by standard contracts as of the end of the period in question (31 December) reached Rb. 8 bln., 992,000 contracts (2.335 bln. 339,000 contracts) and grew 3.5 times in Rb. and 2.9 times in contract equivalent.

As in 2003, futures in 2004 likewise predominated over the segment of forward con tracts. Their proportion in the overall volume of trades accounted for 91.95% (94.4% in 2003), or Rb. 309.3 bln. (201.9 bln. in 2003), while the share of options made up just Rb.

27.06 bln. (12.1 bln. In 2003), which evidences some rise in the latter share, albeit an in significant one. In 2004, it still was the forward contracts on quotations of RAO UES Russia stock that formed the most attractive instrument to investors. Despite that, their proportion in the overall volume of trades fell from 66% in 2003 to 54% in 2004 and made up Rb. bln. The forward contracts on Gasporm stock rose from the 3rd line in 2003 to the 2nd one in 2004, with their respective share accounting for 19.64% (Rb. 66 bln.) vs. 7% in 2003. The share of transactions with LUKOIL futures in 2004 made up 12.8% (Rb. 43 bln.) vs. 12.9% in 2003. The year 2004 saw two new contracts on the market: namely, an option for a for ward contract on the RAO Rostelecom stock quotations and a forward contract on OAO Norilsk Nickel stock quotations. Hence, at present participants in FORTS enjoy the possi bility to conduct operations by 8 forward and 4 option contracts.

The Market for Corporate Bonds The dynamics of the market for corporate bonds in general followed the situation in the stock market, except for by contrast to the latter, its state of affairs had somewhat de teriorated by the end of the year. This is evidenced, in particular, by the dynamics of cor porate bonds indices that Bank Zenit computes basing on market quotations of bonds traded at MICEX34. Thus, by the 2004 results, ZETBI Corp slid by 0.42 points ( 0.38%) from 111.11 down to 110.69 points, while ZETBI Corp10 computed on the basis of quotations of the most liquid corporate bonds fell by 0.31 p. (027.% from 115.8 to 115.49 p.

As noted above, the market for corporate bonds passed through several periods of up and downward trends alternating with each other, which, however, in general coincide with the respective periods noted on the stock market. However, the volatility of the market for corporate bonds was notably smaller than that of the stock market (Fig. 22).

In the 1st quarter 2004, the market for corporate bonds saw a notable rise in quota tions against the background of the growing investor activity. The volume of trade with corporate bonds at MICEX in January, February and March was Rb. 39.7 bln., 55.32 bln.

and 60.5 bln., respectively. Such a favorable situation was determined primarily by an ex cessive liquidity in the national banking sector and some appreciation of Rb. against USD.

The dynamics of yields rates of the US T bills also contributed to the price rise of corporate bonds. Interestingly, while in January and March the respective demand was concentrated mostly on the secondary market which had a direct effect on quotations, in February prices of bonds were rising against the background formed by a considerable primary offer. Addi tional growth factors in March became an extremely favorable state of affairs on mineral markets and Mr. Putins re election.

Bank Zenit has computed its ZETBI Corp and ZETBI Corp 10 indices since January 3, 2002.

Section 2.

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