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Bushs popularity. Even the decision made by the omnipotent FRS Committee for Open Markets to keep the basic interest rate unchanged failed to dump the fall on the stock mar ket that was further driven by the terrorist act in Madrid, as investors viewed that as an in tensification of the terrorist threat. In April and May the stock market found itself under the impact of opposite factors. While on the one hand, positive macroeconomic statistics tat proved an acceleration of the US economic growth and positive corporate news were driv ing stock indices upwards, high oil prices and the deterioration of the situation in Iraq formed the negative mood, on the other. At this juncture, there was another negative factor associated with the US economy: that is, a possible increase of basic interest rates that would contribute to a revision of then existing stock market price levels towards their de cline.

The US stock indices somewhat grew in June. In early June, the market was to a greater extent under the effect of the negative factor associated with the envisaged in crease of interest rates, for A. Greenspan unequivocally let everybody know that FRS was ready to raise interest rates due to inflation rates. In late June, however, he somewhat re vise his stance, for he argued that inflation did not pose a serious problem in the short run.

Plus, the stock market sensed a notable support from some decline in oil prices earlier that month, the publication of a favorable macroeconomic statistics and some decline in yields rates of T bills.

Despite that, the situation darkened in July and August. In July, the US basic interest rate was raised by 0.25% up to 1.25%, while negative macroeconomic and corporate news dominated over the market. More specifically, employment indicators fell lower than expected, while oil prices resumed their rise. The US huge trade deficit did not add opti ECONOMY in trends and outlooks mism either, and all the above was driving the US stock indices down. However, a positive adjustment had been noted on the market by late August. Its causes were technical factors coupled with a notable decline in world oil prices.

In September October the dynamics of the US stock indices on the whole were op posite, while the volatility of quotations was high. While the prices enjoyed a positive sup port from a relatively low yields rate of T bills and solidification of the incumbent Presi dents position in the presidential race underway, the discontinuation of the oil price adjustment and the subsequent price rise for oil, negative corporate financial projections, a high probability of the further increase of the interest rate and low activity on trading spots formed the group of negative factors that were driving the markets downhill. Mr. A.

Greenspans testimony to the US Congress Budget Committee proved the general opinion of the deceleration of the US economic growth and the existence of critical problems (a huge budget deficit and employment challenges).

During last two months of 2004 the US stock indices were growing notably, which can be explained by a series of positive factors. Those were, in particular: Mr. Bushs vic tory and some decrease in the world oil prices, as well as a number of positive macroeco nomic and corporate news. The FRS once again raised the basic interest rate by another 0.25% basic points, i.e. up to 2% annualized. That, nonetheless, had a short term negative impact on the market. In December, the stock market was growing against a substantial downfall in oil prices, while investors found themselves under the negative effect from the rising interest rates that reached 2.25% later that month. The market had been re galvanized by late December by the news of rather high growth rates of the US economy and relatively low yields rates of T bills.

Corporate News A notable progress of some Russian corporations was awarded by granting them with long term credit ratings or revising already existing ones. To exemplify the above, in late January S&Ps ranted OAO Rostelecom with a 6.4 corporate governance rating score out of possible 10. According to the agency, the decision was made with account of Ros telecoms progress in the information disclosure policy area and a pro active approach to investors. The agency believes that so far as the above standards are concerned, Rostele com is ahead of analogous Russian companies and in this regard is a match for numerous telecom companies overseas.

In early August, Moodys and S&Ps announced they had granted Norilsk Nickel with a credit rating. While Moodys decided on Ba1 grade in forex equivalent, with the fore cast of the change for stable, S&Ps went as far as BB, with the same forecast. The companys credit rating by the national scale became ruAA.

In October, Moodys changed its forecast of Sberbanks long term forex denominated rating Ba1 from stable to positive, while the rating of the companys bonds was raised up to Baa2, i.e. higher than Russias. The agency representatives ar gued that those decisions were associated with the Banks significant role in the national economy and banking system, particularly in the area of private deposits.

In early November, S&Ps confirmed the long term credit rating of RAO UES Russia from B to B+ and its RuA+ rating by the national scale with the forecast stable. The agency believes such an increase mirrors the improvement of the companys financial in dicators, a gradual progress in characteristics of the markets for electricity and heating against the background of the countrys ongoing economic progress.

Section 2.

Monetary and budgetary spheres On November 19, 2004, Fitch raised Sberbanks rating up to the investment one. The decision followed the analogous increase in Russias sovereign rating. Sberbanks long term rating was raised from BB+ up to BBB with the forecast stable, while the rating of the banks bonds was likewise raised to the same level. So, all the Banks ratings pres ently are on the investment level.

Numerous Russian companies published their 2004 financial reports, of which some deserve a special attention.

On November 19, RAO Gasprom released its non audited consolidated abridged statement over the first half 2004 drafted in compliance with IFS standards. According to the report, the companys sale proceeds over the first 6 months of 2004 grew by 12% vs.

the respective period of 2003 and made up Rb. 474 mln., while net profit over the period in question dropped by 13,797 mln., or 13% vs. its respective period of 1993 and accounted for Rb. 89, 964 mln.

The same day, OAO Norilsk Nickel also produced its interim consolidated financial statement over the first half 2004. According to the report, in the period in question the to tal production costs of metals sold in USD equivalent grew by 12% vs. the 1st half 2003, while the declared profit over the period in question amounted to USD 889 mln., or practi cally tripled vs. the respective 2003 indicator.

In November, RAO UES Russia published financial results of its performance drafted according to the Russian and international accounting standards. The latter document was published on 1 November. The groups gains from the profile operations over the period in question frew by Rb. 41.9 bln up to Rb. 342.7 bln., while expenditures grew by 36.9 bln.

and accounted for 342.7 bln. The companys net profit over the first half 2004 was over Rb.

15.4 bln., or at 1.5 bln. down vis vis the 1st half 2003. The drop in net profit can be ex plained by the rise in profits that fall on minority stockholders. On 15 November, the com pany published its accounting report for the nine months of 2004. Its gains reached Rb.

24.77 bln., or down from the respective index of the prior year, while net profit stood at the level of Rb. 17.1 bln. (2.31 bln. down vs. the same period of the prior year).

The same month OAO Rostelecom published results of its performance in the first months of 2004. The document was drafted according to the Russian accounting stan dards. Thus, the companys gains over the period in question made up Rb. 27.64 bln., or up by 33.2% vs. the respective period of 2003. The companys net profit reached rb. 6.bln., or at 37.8% more than in the first 9 months of 2003.

In the very early 2005, OAO LUKOIL published results of its financial performance over the first 9 months of 2004. The companys net profit made up USD 3,095 mln., or at 1,292 mln. more than over the first 9 months of the prior year (without regard to the accu mulated effect from changes in its accounting policy and less the sale of the USD 1, bln. worth share in Azei Chirag Guneshli project). The company reported USD 2.46 bln. in federal taxes (less the corporate profit tax), or at over 40% more than in the respective pe riod of 2003. The rise in the companys net profit became possible thanks to a favorable state of affairs in the world mineral markets and improvement of control over its expenses.

However, the rise in profits was constrained by the growing tax burden, Rb. appreciation and a continuous rise in transportation costs.

In 2004, Russian companies continued to acquire new, particularly overseas, assets and establish long term ties that would enable them to expand their business and en hance its efficiency.

In late January 2004 LUKOIL won a tender on exploration and development of gas and condensate deposits in Block A in Saudi Arabia. Experts believe it is the most promising deposit in the area. To implement the project, the company is going to found a RUSSIAN ECONOMY in trends and outlooks ising deposit in the area. To implement the project, the company is going to found a joint venture with Saudi Aramco, in which LUKOIL is going to have the 80% stake.

In March, OAO Norilsk Nickel announced the purchase for cash via its London based 100% daughter company Norimet of a. 98.5 mln. ordinary stock of the gold mining com pany Gold Fields Ltd. The purchase worth a total, in USD equivalent, of USD 1.16 bln., or USD 11.79 per 1 ordinary stock.

One of the critical events of 2004 became the establishment of a large scale strate gic alliance between LUKOIL and ConocoPhilips. It is envisaged that the US giant will be come a strategic investor in LUKOILs capital. The announcement was made after a Cono coPhilips affiliated structure won in an auction on the purchase of a 7.59% the Russian oil companys declared and issued ordinary stock that had earlier belonged to the federal government. The price of the deal amounted to USD 1.988 bln. (USD 30.76 per 1 share).

By late 2004 the group of companies Slavneft had completed a deal on the purchase of a package of ordinary and preference stock of OAO Slavneft Megionneftegaz (MNG) from minority stockholders whose interest was represented by Vostok Nafta. The pur chased stake accounts for 6.4% of the OAO Slavneft Megionneftegazs authorized capital.

As a result of the transaction, the Slavnefts share in the MNGs authorized capital grew up to 56.4%. Slavneft owns 69.12% of the total number of ordinary and 18.11% of the total number of preference stock of OAO Slavneft Megionneftegaz. Consolidation of the equity capital of Slavnefts dauhter companies should help the group improve its corporate struc ture.

In 2004, Russian companies have been fairly pro active in attracting an additional volume of investment, particularly from overseas financial markets, and solidified their po sitions on the global capital markets.

In March, the LUKOIL Board ruled to issue documentary interest non convertible payable to bearer bonds with the term of maturity of 5 years. The issue included 6 mln.

bonds with the face value of Rb. 1,000 each. Their coupon period is 6 months, and the in terest rate by all the coupons is equal and should be set by results of a tender on the date of the start of the placement. The three year offer is envisaged on the issue. The same month Slavneft repaid in full its Rb. 2. bln worth bonded debt, as per the terms of its issu ance. At the same time, the company paid out revenues on the 4th coupon on the second series bonds at the rate of 8.89% annualized, or Rb. 44.33 per each bond with the face value of Rb. 1,000. The overall bonded debt repayment amounted to Rb. 88.66 mln.

Liquidity of Russian companies on the Western exchanges is worth a separate com ment. In particular, in June, there appeared information that the volume of trading with the OAO LUKOIL securities at London Stock Exchange hit the record breaking USD 2.41 bln.

The dynamics of trades evidenced a constantly growing interest in the companys papers.

Thus, while in 2003 the average monthly volume of trades was USD 801 mln., it reached 1.52 bln. over the first four months 2004.

In September, OAO Norilsk Nickel appointed Citigroup and Morgan Stanley co lead managers of the planned debut issuance of its Eurobonds denominated in USD. The USD 500 mln. worth issue was placed on September 17, with the yields rate 7.125% and the maturity date September 30, 2009 . The demand for the issue was more than 4 times greater than the offer. The company will irrevocably and unconditionally guarantee its Eurobonds.

In October, OAO gasporm placed its Rb. denominated bonds of A5 series with the face value of Rb. 1,000. The issue was worth a total of Rb. 5 bln. with the maturity term of years. According to results of a tender held at MICEX, the coupon rate payable each days was set at the level of 7.58% annualized. Investors submitted 120 bids worth a total of Section 2.

Monetary and budgetary spheres Rb. 9 bln., of which 73 bids were accepted. It is intended to spend the attracted capital on funding investment necessary to maintain the existing production capacities, implementa tion of new promising projects and refinancing the companys short term debts and opti mizing its debt portfolio structure In mid October, OAO Norilsk Nickel placed a bond issue worth a total of USD 500 mln.

with the yields rate under placement of 7.125% annualized with the maturity date on September 30, 2009. Again, the demand for the issue was over 4 fold greater than the offer.

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