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Monetary and budgetary spheres 105.0% ZETBI-Corp ZETBI-Corp102.5% 100.0% 97.5% 95.0% Source: Bank Zenit Fig. 22. The Dynamics of Price Indices of Corporate Bonds in (January 5, 2004 = 100%) The 2nd quarter became the period of the turn of the upward trend on the market in question. Quotations were falling at a rather high pace, while the periods of a positive ad justment were short and investor activity fluctuated considerably. Given that in April the turnover of the trades of the MICEX section of corporate bonds made up a. Rb. 68.8 bln., in May and June it was 35.5 bln. and 48.8 bln., respectively. The price downfall was deter mined in part by deterioration of the external environment, particularly, the rise in the US T bills. There also were some domestic causes, such as some depreciation of Rb. and a number of fairly large placements conducted in April and May. But it was an extremely un favorable situation with liquidity in the banking sector that had a critical effect on the dy namics of quotations. On the one hand, the tide of crisis manifestations on the interbank credit market compelled numerous banks of the 2nd3rd echelon to sell bonds to complete their liquidity, which put a pressure on prices. On the other hand, having an excessive li quidity due to the reduction in limits on the interbank credit market, large banks were buy ing the first echelon banks bonds, thus supporting prices. Notwithstanding this, by late June early July the sellers had intensified their pressure on the market for corporate bonds across yet a greater assortment of issues. That was fueled by rumors of Guta Banks problems and the private clients raid on Alfa Bank. Consequently, in mid summer the bonds quotations demonstrated repetitious ups and downs against the background of a downward trend. The unfavorable situation on the market restricted possibilities for issu ers to borrow capital under acceptable terms, which is why many of them decided to post pone placements of their bonds.

July saw a record breaking downturn in quotations. Thus, the corporate bonds index Zenit computes basing on the MICEX quotations made up 107.9 p. on 8 July, while the in ECONOMY in trends and outlooks dex of the 10 most liquid bonds sank to 112.08 p. Thus, given a general improvement of the situation in the banking system, the market basically stabilized in early July, with the turnover of trades on corporate bonds accounting for Rb. 49.12 bln. The situation on the world market also remained stable, with the yields rates of the US T bills somewhat lower ing. However, in Russia, the quotations found themselves under a relatively greater impact on the part of domestic factors. More specifically, because of the private depositors agita tion, the banks had to maintain a sufficient volume of liquidity, which compelled them to sell assets and particularly the Russian corporations bonds. More fuel to the fire was added by S&Ps statement regarding vague prospects for raising Russias credit rating because of political risks associated with the YUKOS case, problems in the banking sphere and deceleration of the electricity sector reform. The key event of the month became the information of a possible sale of Yuganskneftegas. That generated vigorous sales in all the segments of the Russian financial market, including the one for corporate bonds, which resulted in a notable downfall in quotations.

Between August through October the market for corporate bonds was undergoing the stage of a gradual restoration of quotations. In August, the activity on the market was low, due to the holiday season. External factors were remaining favorable to the bonds market, including Russias, while a stable situation with the banking liquidity against the summer lull helped quotations stabilized at earlier attained levels. However, in the second half of the month, the market reacted to the statement of the government of the city of Moscow on its willingness to place two new issues by sales of these papers. That could be determined by the investors eagerness to create a favorable environment prior to the trades. But, as the placements outcome had failed expectations of most investors, that re sulted in fixing profits on the market. In early September, the market was still after the Moscow auctions, but in mid September investors were keen to buy the first echelon papers. That was steered by the data on inflation that evidenced that CBR would have to cope with the Mission Impossible of simultaneously holding inflation within 10% and have Rb. appreciate by not more than 7%. Some investors might sense a slight rise in the USD/Rb. exchange rate as a signal that the Bank of Russia had made its choice in favor of inflation and decided not to appreciate USD. That is why stags began to close their posi tions on the forex market and switch to long papers. But the Central Bank kept on main taining the USD exchange rate at the level of 29 Rb., which chilled investors optimism and resulted in a price adjustment in the market. October 2004 saw the investor activity on the market for corporate and regional bonds being on a record breaking level, which helped the quotations of the most liquid issues to finish the month in the positive area. The turn over of the market for corporate bonds made up a. Rb. 72 bln. The positive dynamics of the market were also inspired by Moodys decision to raise Vneshtorgbanks and Sber banks ratings at 1 point above the countrys.

Rather a long of growth was followed by the adjustment phase in November. Given no clarity in regard to the CBRs policy priorities on the forex market, the inflation and ex change rate factors exerted far weaker inlfuence on the dynamics of quotations, thus be ing replaced by the external state of affairs and particularly the negative dynamics of the basic assets. After the November drop, in December investors were trying to restore their activity, albeit quotations were falling across the most liquid issues. Once a substantial vol ume of primary offer had attracted a considerable part of liquidity, that helped bears oper ating on the secondary market. Then the information on backtax claims to Vympelkom triggered the avalanche of sales, especially in the telecom sector. Notwithstanding that, the situation on the primary market was a bit better, which was evidenced by a successful Section 2.

Monetary and budgetary spheres placement of the Russian Railroads bonds against the background of a high level of liquidity in the banking sector.

The issuers activity on the primary market differed substantially from month to month. Thus, the peak volume of placements of corporate and regional bonds on the pri mary market was registered in April and accounted for a. Rb. 27.93 bln., while the mini mum volume was noted in May and it accounted for Rb. 4.81 bln. The aggregate volume of primary placements of corporate bonds over the whole 2004 roughly made up Rb. 194.bln. vs. 84 bln. reported in 2003.

The Factors of the Dynamics of the Russian Stock Market The 2004 dynamics of the national stock market were determined a whole range of factors that can be conditionally classified into the following groups:

Domestic political situation;

Relations with international financial organizations;

Situation on the international financial markets;

World prices for minerals (oil, particularly).

Each group was exercising an ambiguous influence on the dynamics of different segments of the domestic financial market. That is why we are going to analyze their influ ence individually and in a greater detail, while the last group will be considered below, in the respective section of the present review.

Domestic political situation. The year 2004 has become the period of the growing pressure on the national business community, which logically was accompanied with growing political risks in the domestic financial market. While investors viewed Mr. Putins re election as a warrant of the continuation of the political course, it became clear that the government was keen to increase its intervention in the private sector.

The most obvious evidence became the systematic attack on YUKOS. Thus, in April 2004, the court of law ruled to arrest the companys assets. In the aftermath of that S7Ps decreased the companys long term rating. In May, the Moscow City Arbitration Court ruled to exact from YUKOS over Rb. 99 bln. in backtaxes, penalties and fines for 2000. in July, the Ministry of Taxes and Levies produced new backtax claims for 2001. Plus, at the end of that month the market received information of a possible sale of YUKOSs pearl, Yuganskneftegas, to repay the companys tax debts. In September, the RF Ministry of Jus tice informed of a USD 10.4 bln. worth appraisal of Yuganskneftegas, which proved to fall far below the market expectations and the appraisal by Drezdner Kleinwort. Furthermore, there shortly appeared information of a probability of a sale of a 77% stake of Yuganskneftegas with a 60% discount. The pressure on the company intensified by the end of the year in November, USD 9 bln. worth backtax claims were produced which increased the aggregate amount of backtax claims up to USD 14 bln., i.e greater than the companys overall capitalization as of the date. In December, the investors attention fo cused on results of the auction on Yuganskneftegas. As noted above, the formal buyer of the company became previously unknown Baikalfinansgroup, and the uncertainly around the auction vanished after it became known that the winner in turn had been acquired by Rosneft.An additional rise in political risks was caused by information of backtax claims to Vympelcom in December. By contrast with YUKOS, Vympelcom was established after the period of the dubious privatization deals and has been one of the most transparent com panies in the country.

Overall, 2004 saw the rise in political risks and the authorities pressure on the private sector. Despite an extremely favorable state of affairs on the world mineral markets, it is RUSSIAN ECONOMY in trends and outlooks because of the political risks that the Russian stock market ultimately demonstrated prac tically zero dynamics.

Relations with International Financial Organizations. Russias relations with in ternational financial organizations were quite successful over the year in question. Russia was fulfilling its debt obligations in full and according to the earlier set schedule. In addi tion, in September 2004, there appeared information of Russias intention to start consul tations with the Paris Club on an early repayment or exchange of its USD 4.7 bln. worth debt.

In late January, S&P raised Russias credit rating by its obligations denominated in foreign exchange from BB up to BB+ and those in Rb. equivalent from BB+ up to BBB . In October, because of the improvement of the macroeconomic situation in the country, Moodys decided to change its forecast of Russias credit rating for positive But the major event of 2004 in this respect became the increase of Russias long term credit rating in forex and Rb. equivalent by Fitch from BB+ up to the investment level BBB ;

plus, the countrys short term rating was raised, too. The agency representatives stated that it became possible due to the countrys considerable progress on the macroeconomic front against high oil prices and a sound tax policy. They believed those factors considered to help the country lower the volume of its public and external debt, as well as substantially complete its foreign reserves and stabilization fund. All that, argued Fitch experts, sub stantially increased the RF Governments capability to service its debts even in the event of a serious crisis.

Situation on the International Financial Markets. Last year saw the state of af fairs on the world stock markets improve insignificantly. For instance, by results of 2004, Dow Jones and NASDAQ Composite grew by 373.16 and 168.76 p., or by 3.58 and 8.41%, respectively vs. the beginning of the year (Fig.23). The fact that the volatility of the US stock market was considerably lower than that of the Russian stock market is worth a spe cial attention. The main factors affecting the dynamics of the 2004 market were high oil prices that constrained economic growth in the US and encouraged inflation processes.

The danger of the latter compelled the federal administration to revise their policy priorities in the monetary and credit area, which resulted in the repeated raising of the basic interest rate. But that fact did not seriously batter the US stock market, for the rate was raised gradually and market expectations, as a rule, coincided with the Federal Reserves deci sions. So, the effect from raising the rate found itself already mirrored, at least, in part, in prices prior to the respective announcement. The situation in the Middle East and particu larly terrorist attacks in Iraq were the investors headache in 2004. Finally, the US presidential race outcome gave investors clear evidence that the new Administration would pursue the same political course.

In January, extremely favorable corporate news became yeast for the dynamics of the US stock market most corporations performance information overran analysts ex pectations, while macroeconomic statistics was basically positive. Since February, how ever, the quotations began their gradual slide, particularly under effect of the macroeco nomic statistics, including unfavorable data on the state of the US labor market. But as most corporate reports proved to be better than expected, there was no drastic fall in quo tations.

Section 2.

Monetary and budgetary spheres 140% Dow Jones Industrial Average NASDAQ Composite RTS Index 130% 120% 110% 100% 90% 80% Fig. 23. Dynamics of Dow Jones and NASDAQ in (December 31, 2003=100%) The market downturn further intensified in March, because of the deceleration of the US economy, unfavorable data on the labor market, world price rise for oil, and drop in Mr.

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