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According to the data as of December 29, 2006, the top five list of companies by capitalization was as follows: Gazprom USD 272.25 bln, Rosneft SD 83.bln, LUKOIL USD 74.18 bln (against USD 50,5 bln in 2005), Sberbank of Russia USD 65.6 bln (USD 24.89 bln in 2005), Surgutneftegaz USD 54.7 bln (USD 38. Tatneft GMK LUKoil Rosneft Russia Gazprom Russia NorNikel RAO UES Mosenergo Rostelekom Sberbank of Gazprom Neft Surgutneftegas RUSSIAN ECONOMY IN trends and outlooks bln in 2005).There were no expressed changes in the companies rating in terms of capitalization as compared with 2005. It should be noted that the four most capital ized companies of Russia belonged to the oil and gas sector against three compa nies in the previous year, which is explained by extremely favorable conditions in the primary commodity markets in 2006. Sberbank of Russia had the highest capi talization among the companies that do not belong the primary commodity market, like in the previous year.

Futures Contracts Market Every year FORTS market (Futures and Options on the RTS) is steadily grow ing, and celebrated, and the year of 2006 was not an exception. For example, the turnover of futures and options contracts in the futures market totaled nearly RUR 2 708.5 bln in the previous year, as opposed to RUR 711.54 bln in 2005. In other words, the turnover of the futures contracts (FORTS) market in 2006 has grown nearly three fold as compared with the corresponding figures of the previous year.

Participants of the market entered into nearly 5 million transactions to amount to 89.6 million contracts (nearly 1.96 million transactions and 54.87 million contracts in 2005). The average daily volume of open positions on standard contracts was RUR 64.6 bln, 2.24 million contracts, to grow 2.6 times in rubles and by 37.2 per cent in contracts as compared with 2005. During 2006 the volume of open posi tions reached maximum level to the amount of RUR 147.8 billion (on December 12) and 4.19 million contracts (as of the same date). A share of futures transactions was the largest in the segment of futures contracts in 2006 to account to nearly per cent of the total trading volume or RUR 2 397 bln (RUR 630.53 bln in 2005), while the value of option transactions amounted to only RUR 311.4 billion (as op posed to RUR 81.01 billion in 2005). Hence, a share of options transactions by trading volume remained in the last year at the same level as compared with 2005.

Some dynamics was observed in the ratings of trading volumes of a number of contracts. Thus, upon placement in the market of RTS index futures in 2005, it be came most attractive for investors in 2006. Its share in the total trading volume made 27.7 per cent. It was followed by futures contracts on market value of the shares of Gazprom and RAO UES of Russia, whose shares in the total trading vol ume made 27.74 per cent and 20.79 per cent accordingly (21.62 per cent and 27.37 per cent in 2005). The next in the list is LUKOIL (significantly lagging behind the leaders), with the share in the total trading volume of 7.77 per cent (against 17.59 per cent in 2005). Among the options, those ones for futures of Gazprom shares were in highest demand (3.95 per cent in the total trading volume of the market of futures).

In 2006, some new instruments emerged in the market. On February 14 fu tures contract on Moscow ten year bonds was launched, which is currently the sole long term interest rate derivative. On February 20 futures contract for the RF Euro bonds with maturity term in 2030 was launched. Hence, there emerged a new mar ket instrument for risk hedging and the investors have an opportunity for arbitration between Eurobonds 30 and US Treasuries at minimum expense. Futures contract for Moscow Inter Bank Offered Rate was launched on May 30, which became the Section Monetary and budgetary spheres first market instrument for risk hedging of short term rates. Futures contracts for Urals oil and gold were launched on June 8, opening a new stage in FORTS market development. Further expansion of the number of commodities contracts can con tinued with oil and gold options, as well as futures for oil. Finally, futures contract for common shares of OAO Rosneft and options for futures contract for common shares of OAO GMK Norilsk Nickel were launched on October 16. With appearance of the new instruments, a full set of derivatives was formed for all blue chips of the Russian stock market. Hence, for the time being, FORTS participants can enter into transactions on 16 futures and 7 option contracts.

Corporate Bonds Market In 2006, the market of corporate and regional bonds was stable in general.

However, the corporate bonds market did not demonstrate any expressed dynam ics in 2006 as compared with the stock market. This is evidenced by the movement of corporate bonds indices assessed by Zenit Bank on the basis of market prices of bonds traded in the MICEX41 (Moscow Interbank Currency Exchange). In 2006, the ZETBI Corp index grew by 0.43 points ( 0.39 per cent) from 111.52 to 111.points. However, the ZETBI Corp10 index, which is assessed on the basis of quota tions of most liquid corporate bonds, grew from 118.2 to 119.11 points in 2006.

As compared with the market of government bonds, corporate bonds market quotations demonstrated higher volatility throughout 2006. Three periods can be highlighted within the year, when the dynamics of prices were different. (Fig. 17).

The first one lasted from January to June, when a downward trend was prevailing in the market. The second period from July to September, when the market was growing in general, while the most liquid bonds have stopped at the maximum lev els of 2006. Finally, during the third period the market indicators remained at the level of late October, despite significant downgrading in November and upgrading in December.

Making an analysis of monthly dynamics of quotations, we should mention, that long January vacations have provided a negative impact over investors activity in the market of corporate and regional bonds. Nevertheless, in early January quo tations of the most liquid bonds have somewhat grown. Making an analysis of ex ternal factors, we should note, that the dynamics of US bonds and Russian Euro bonds made for the decline of corporate bonds prices. As opposed to that, domestic economic factors supported the stock market: RUR was strengthening against USD, liquidity was maintained at a reasonable level. The situation in the primary market was rather quiet, whereas the volume of trade was quite low.

In February March relatively positive dynamics was observed in the market.

The impact of primary market factors grew stronger: a considerable volume of pri mary offer made for the outflow of assets from the secondary market. Moreover, foreign currency market, where some decline of RUR versus USD was observed, made an additional pressure on prices. Apparently, the market dynamics was de pendant on expectations for further growth of interest rates in developed markets, whereas other factors did not contribute to the market downfall (Russian Euro RUSSIAN ECONOMY IN trends and outlooks bonds quotations remained stable, and by the end of the month RUR has restored its position against USD). One more reason for the market downgrading was an upgrading of interest rates by industrialized countries (USA, European countries, Japan), which demonstrated a lower attraction to investment value.

101.0% ZETBI-Corp ZETBI-Corp100.5% 100.0% 99.5% 99.0% 98.5% Source : Zenit Bank.

Fig. 17. Corporate Bonds Price Index Dynamics in ( January 10, 2005 = 100per cent ) Within the next month investment activity in the market of corporate bonds has considerably grown, what however did not bring up a noticeable positive trend;

quotations of the most liquid bonds were variable. The basic external factor that ef fected the situation, was uncertainty in regard to further priorities in the US FRS credit and monetary policy, which provided an immediate impact on activities of in vestors in emerging markets. Another upswing of oil prices in the international mar ket and confrontation between Western countries and Iran also did not add to at traction of investors. An excessive pressure over the prices was made by interest rates growth in the inter banking market. Even an expressed upgrading of RUR against USD could not contribute to the demand for securities.

May was characterized by moderate growth of quotations of the most liquid issues of corporate bonds against the background of relatively high activity in the market. The market was resistant to negative external factors. Apparently, it can be explained by the background of massive release of assets in the stock market and general aggravation of the situation in the international markets, when corporate bonds were regarded by investors as relatively attractive opportunity for invest Monetary and budgetary spheres ments. Moreover, the initial the structure of investments in the market of securities and corporate bonds was variable: investments in securities are made as a rule for a short term for speculative purposes, while investments in corporate bonds are more conservative, and the investors, involved in such operations, are governed by the basic market indicators and are less affected by short term trends. One should not ignore also the factor of liquidity, which is traditionally one of the most effective one for the RF debt market, as well as continued strengthening of national cur rency.

However, May growth did not last long and since June the market started to get down, which has affected a wide range of securities. Investment activity was still high, what confirmed both, technical and fundamental character of the decline.

Uncertainty in the US FRS policy remained one of the basic fundamental factors, effecting financial markets in the majority of countries. Comments of the US finan cial authorities, that inflation is getting beyond a comfortable margin, have con firmed a high probability of further upgrading of interest rates. Hence, in May that factor has mainly effected the bonds market, whereas in June it has naturally made an impact on the debt market. Like some months before, the major factors, sup porting the market, were rather high liquidity level in the banking sector and RUR strengthening against USD.

July was a turning point in the trend of corporate debt market, as well as in other sectors of the Russian financial market. In many ways it happened due to general improvement of the situation in the world debt market in general and in the Russian Eurobond market in particular. High liquidity and lowered inflation in the RF contributed to additional support to quotations. Rather large volume of securities was traded in primary market and restrained quotations in a way. The growth of corporate bond price continued in August due to high liquidity (international stock market quotations made about 23 per cent per annum), upgraded RF rating a month ago, favorable situation in the external debt market and lower inflation ex pectations.

The growth, observed within two months, in August and September, was re placed by variable price dynamics, and as of monthly results, quotations were changed insignificantly. External factors had a negative effect. Thus, a probability of increased interest rate in the EU and stability of that factor in the US were re straining the growth of quotations of the bonds, denominated in foreign currency and in RUR. In line with that, one could note the upsurge of volatility of USD nominal exchange rate as opposed to its relatively stable rate against RUR. In the back ground of expressed decline in the world oil prices, the investors realized, that one could not expect any support from that factor, which has been observed for the greater part of 2006. External factors also restrained the growth: liquidity decline, large volumes of primary placements. Regardless the fact, that by late September the yield of the most liquid issues got down to the minimum level, expressed changes in the structure of basic factors provided a growing pressure on prices.

Information on upgrading of the RF long term credit ratings by S&P credit agencies made a positive impact on the market.

RUSSIAN ECONOMY IN trends and outlooks In late October there started a smooth decline in the market. In general, ex ternal background remained neutral. On the one hand, interest rates in US and Europe remained unchanged, what contributed to stabilization of quotations. On the other hand, a noticeable aggravation in natural resource markets provided an adverse effect on prices of corporate bonds. Reduction of prices (for Brent) be yond USD 60 per barrel fostered downgrading of Russian securities, and then corporate bonds prices. Domestic factors also made a negative effect: the volume of offer in primary market was large, the situation with liquidity was deteriorated at the end of the month (the yields reached 7 10 per cent per annum).

In November the market trends were variable, but as of results of the month, the majority of the issues demonstrated some growth. The basic factors, that hin dered the upward trend, were aggravated situation with liquidity in the bank sector and large volume of primary placements. On the other side, significant RUR strengthening against USD highly contributed to attractiveness of the securities, denominated in RUR. In December the market situation has improved due to posi tive macroeconomic factors, as well as upgraded financial indicators of business companies and ratings of some of them. The most negative factor was massive placements in the primary market, distracting the assets form secondary market.

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