The accumulation of foreign reserves by the Bank of Russia was accompanied by a growth in the money base (see Figure 2). In the first Quarter 2000 the narrow money base grew by 3.7%, and during the first three weeks of April – by yet 6.5%.
That can be illustrated using the ratio of the two monetary multipliers computed on two different bases: the ratio of М2 to the narrow monetary base, and the ratio of М2 to the broad monetary base (or reserve money, see Figure 3). Whereas prior to August 1998 crisis these two indicators had identical dynamics before, since January 1999 through 2000, they have begun to evolve in opposite directions – while the narrow monetary base growing, while the broad monetary base multiplier continuing to decline. This can be attributed first to a wider gap between the narrow and broad monetary bases, that is, the sum of idle reserves (balances on corresponding accounts with the Central Bank) and funds deposited by commercial banks (for example, deposits) with the Central Bank. The analysis of the broad monetary base dynamics shows, therefore, that money is locked up within the banking system, where it poses a threat against the national currency exchange rate at the slightest blip of uncertainty or risks, reluctant to flow into the real sector of the economy.
S. Arkhipov, S. Drobyshevsky
The government securities market. In late-March ‑ April 2000 the price correction was observed at the Russian market for foreign debt, which followed a rapid growth of the securities quotations on the eve of the Presidential Elections in Russia on March, 26 (see Figures 1 and 2). By late-April the prices for Minfin bonds and the medium-term and long-term eurobonds went down by 3–5 percentage points compared to the maximum level reached in the last decade of March 2000. Quotations of the shortest eurobonds (maturity in 2001) remained stable (93–94% of face value). Thus, over the last two months the yields on the Russian currency denominated securities fluctuated within the range between 13–18% annualised during last two months. The yield curve of eurobonds was concave, with the peak falling on the eurobonds matured in 2003–2007.
The situation at the market for GKO-OFZ was stable in April. The average level of yields to maturity equalled to 30–35% annualised, the weekly turnover at the secondary market – 2.5–3.5 billion rubles.
On April 19, 2000, the Russian Ministry of Finance held an auction on placing two new tranches of government short-terms bills (GKO). The GKO 21137 (issued at a volume of 2.5 billion rubles) was placed only among non-residents ‑ holders of 'C' type accounts, GKO 21140 (2.5 billion rubles) – among residents and non-residents.
The initial demand was about 6.6 billion rubles, the placed volume (by face value) – 3.77 billion rubles, the revenue of the RF Ministry of Finance – about 3.7 billion rubles. Non-residents once again ensured an extremely low level of yield to maturity. Thus, the cut-off price for GKO21137 was set at the level of 100% of face value, and the average-weighted price for placed securities made up 100.16% of face value. That corresponds to the yield to maturity less 0.28% annualised.
Stock market. In April 2000, the attention of the investors operating at the Russian stock market switched from the political sphere to the situation at the international financial and commodity markets. Sharp fluctuations at the US and European stock markets, the uncertainty concerning the interest policy in the USA and European Union and the drop in international oil prices encouraged many investors to take a ‘seat-and-wait’ stand with regard to the Russian stock market.
In March 2000, due to the fact that investors’ forecast of the outcome of Presidential rally had been correct, the RTS Index grew from 170.93 to 231.88 points, i.e. by 35.66% (see Fig.3). In April, quite a high volatility in prices was observed at the Russian stock market. During the first half of April the RTS Index dropped to the level of 200 points, i.e. by 12.5%. Nevertheless, during the second half of the month the stock prices have grown insensibly. Thus, in April 2000, the RTS Index fell from 231.88 to 226.18 points, i.e. by 2.16%.
In April 2000, the drop in investors’ speculative activity manifested itself in a decreased trading turnover in the RTS. Over the month, the total turnover in the RTS made about $499.2 mln. That is at 38.4% inferior to the respective index registered in March (810.76 mln.).
In April, the quotations of the Russian blue chips demonstrated various dynamics (see Fig. 4). During the month it was stocks of ‘Mosenergo’ (–1,55%), ‘Norilsky Nickel’ (–1,70%), RAO ‘UES Russia’ (–3,99%), 'Tatneft' (–4,27)%, 'LUKoil' (–4,44%) and ‘Rostelecom' (–19,55%), quotations of which fell most appreciably. Such a significant correction in prices of ‘Rostelecom' stocks was caused by investors’ serious overestimation of these stocks. As it was noted in the previous IET report, between February to March the price for stocks of ‘Rostelecom' grew by 89.1%. At the same period the RTS Index grew only by 30.6%.
In April growth in prices was fixed by stocks of ‘Irkutskenergo’ (3,57%), ‘Sberbank of Russia’ (4,01%), ‘Surgutneftegas’ (5,41%) и ‘Megionneftegas’ (18,80%). It is most likely that the sharp growth in stock prices of ‘Megionneftegas’ resulted from a correction in prices (in March the quotations of ‘Megionneftegas’ dropped by about 1% against a 35.7% growth in the RTS Index). The growth in stock prices for ‘Surgutneftegas’ was caused by more fundamental reasons: in April the rate for the share swap between the holding company AO ‘Surgutneftegas’ and subsidiary company NK ‘Surgutneftegas’ was announced. Thus, in the process of consolidation of the company the risk of infringement of shareholders’ interests has decreased significantly.
In spite of a 40% drop in the total turnover in the RTS registered in April 2000 compared to its respective index of March, the aggregate share of the most liquid stocks in the structure of trades in the RTS changed insignificantly. In particular, during the third week of April, the share of the five most liquid stocks made up 76.86% against 75.60% in March. At the same time, the composition of leading stocks by its share in the total turnover has changed slightly at the market. For example, in late April the share of RAO ‘UES Russia’ stocks in the total volume of trades was about 37.83% (31.58% in March), the share of ‘LUKoil’ stocks – 19.57% (22.61%), the share of ‘Surgutneftegas’ preferred stocks – 6.83% (in March – only 2.44%), the share of ‘Surgutneftegas’ common stocks – 6.51% (5.85%).
In April 2000, the main factors which influenced the situation at the Russian stock market were, as follows:
Firstly, in April the political factors lost their dominant influence on the Russian stock market. Many investors brought down their speculative activity yet in late-March, when the result of the Presidential Elections had became evident. That entailed a gradual decline in prices for the Russian stocks accompanied by the fall in trade volume. At first glance, the situation seems to be rather paradoxical: the stock prices grew rapidly over the period of the pre-electional uncertainty, but later investors’ interest in the stock market vanished as soon as political risks became substantially lower. That could be caused by a number of negative factors, which manifested themselves in April, such as sharp fluctuations at the world financial market, the decline in oil prices, uncertainty with regard to results of negotiations between the Russian Government and the international financial organisations, and a growing pressure on Russia on the part of the world community caused by the continuing military operations in Chechnya (the PACE decision to recommend to exclude Russia from the European Council). It was these factors that, regardless important changes in political sphere, have led to the price correction at the Russian stock market.
At the same time, in our opinion, today investors evidently underestimate the decline in political risks. The emergence of the situation in April 2000 allowed visible consolidation of the Government and the Parliament. In light of that, an absence of any serious problems with the passing of the START-2 Agreement by the State Duma and the approval of the Attorney General by the Federation Council were very illustrative. These decisions demonstrated the deputies’ and senators’ willingness to collaborate closely with the executive power. Hence, the Government’ task to launch a new round of economic reforms should face no serious opposition from the either parties.
Secondly, the forthcoming in May 2000, (after the Inauguration) appointment of a new Government and due the publication of the Putin's economic programme in June – July paves a way to the reactivation of the negotiations between Russia and the IMF and the Paris Club. In case the new economic programme does not raise any serious objections of the IMF, new IMF's loans to Russia would be very likely to disburse yet in the coming summer. At the same time, certain complications could arise in respect to compliance with the IMF's terms, particularly with regard to structural reforms in the economy, decline in the magnitude of non-payments and barter, the banking system restructuring, and the auditing of the biggest Russian commercial banks, in which the state has its stock (Sberbank, Vnesheconombank and Vneshtorgbank of RF).
The arrival to an agreement between Russia and the Paric Club of creditors regarding the Russian debt restructuring, which should be similar to the one concluded between the Russian Government and the London Club, seems to be very problematic today. Germany, Italy and France stand firm on the issue, and their position might be corrected slightly after the G-8 Summit in Okinawa. However, the mitigation of the developed countries’ position towards Russia will be affected by the continuous military operations in Chechnya.
Thirdly, by mid-April a rapid drop in international oil prices, which has begun since early March 2000, stopped. Between March 1 to April 11 the price for the nearest future contracts on the Brent oil at the NYMEX dropped from 29.55 to 20.98 dollars per barrel, i.e. by about 29% (see Fig.5). Such a dramatic drop was followed by the correction in prices. By April 27 the price for Brent oil contracts at the NYMEX reached 23.13 dollars per barrel. Thus, during the last month the drop in the oil price made up about 4.8%.
It is necessary to note that in mid-April the statements of the OPEC officials stabilised the situation at the oil markets. According to those, the OPEC countries co-ordinated a mechanism of decrease in the limitations on oil extraction that would be put into effect should within twenty days the international oil prices be lower than 22 dollars per barrel. Due to that, the international oil market has acquired a very important reference point in prices. That is why it is most likely that at the new OPEC countries’ meeting due on June 21, 2000, the question concerning the change in the limitations on oil extraction and sales will not be included in the agenda. Thus, today there are no serious reasons to envisage a further sharp fall in international oil prices, which increases the attractiveness of the Russian oil industry for investors and decreases the risk of losses in respect to tax revenues of the 2000 Federal Budget.
Fourthly, in April 2000, the state of affairs at the international financial markets affected the situation at the Russian stock market. The majority of investors focused on fluctuations at the US and EU markets. A sharp drop in prices for securities at the developed and emerging markets revealed a set of interrelated problems. First of all, the main problem is the fact that the growth rate in the US economy is distinctly superior to the growth rate in the European countries. The high growth rate in the US economy increased the probability of growth in the inflation rate. To keep this process under control, the Federal Reserve has been gradually increasing its discount rate. That shift in the discount rate entails two processes: for American companies, the loans became more expensive and international capital fled from the European to the US financial markets. At the same time the European Central Bank did not raise its discount rate to the level comparable to the American. As a result, during the previous months the Euro exchange rate has declined. That became an additional factor that urged international investors to focus their eyes on the US markets.
Another problem, which negatively manifested itself in April 2000, was a rapid growth in prices for the Hi-Tech American companies. Until April, many investors preferred to invest in this sector guided by the fact the said companies are susceptible to the risk of growth in interest rate to a much lesser degree than others. In a certain sense, a sharp growth in the Nasdaq Index noted over several months (see Fig.6) was generated by the US Federal Reserve’s discount rate policy.
Investors began to consider the ‘bubble’ problem with regard to the Hi-Tech companies’ stocks as soon as the financial results for the first quarter of 2000 were announced. In particular, these companies showed no significant profit rate. Moreover, pessimistic projections appeared in respect to some Hi-Tech companies’ destiny. According to some experts, the volume of sales of Hi-Tech companies is expected to drop and Microsoft faces the danger of a compulsory break up into smaller companies. Thus, investors have changed their mind with regard to this segment of the US stock market. As a result, stock prices and indexes in the USA and other countries dropped appreciably (see Tab.1).
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