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In April the RF Government succeeded infinally overcoming tensions in its relations with the Paris Club of creditors:Russia had practically resumed payments to the Club according to the scheduleafter the disruptions in January.

The relations between Russia and theInternational Monetary Fund progressed more favorably in 2001. The Minfinremitted $1.077 bln to the IMF between January and September.Russia’s debt to theIMF declined to $7.69 bln by the end of the elapsed year. Thus, the debt to theFund will be less than the RF quota in the Fund’s Charter Capital. The total publicdebt of the Russian Federation reached 52 percent of GDP by the year-end, whichis an acceptable level even for developed countries.

Russia does not currently have a jointprogram with the IMF. However, Russia does not overrule the possibility ofresuming talks with the International Monetary Fund on credit extension in theevent of a sharp drop in oil prices.

At a meeting held in Moscow in earlyOctober with Horst Keller, Managing Director of the International MonetaryFund, RF President V. Putin announced an intent to make early repayment underthe IMF credit amounting to $4.8 bln extended in the summer of 1998 to theCentral Bank to support the gold and currency reserves. According to the Minfindata, the debt of Bank of Russia to the IMF as of mid-2001 totaled $2.8 bln. Inaddition, the RF Government plans to create a financial reserve in the amountof 109.8 bln rubles ($3.5 bln) intending to keep it for repaying part ofexternal debt in 2003, when Russia is to pay a total of about $19 bln under itsexternal debt.

The world’s major rating agencies have notedpositive changes in Russia’s economy. Fitch Agency has upgraded the long-term rating for forexborrowing to B+ with the long-term rating in the local currency upgraded toB. The forecast for long-term rating changes is stable. Standard&Poor’s upgradedRussia’s long-termrating in forex and local currency from B to B+ and has confirmed its Blevel in the short-term credit rating. Long-term rating projections have beenreviewed from positive to stable. S&P report says thatRussia’s higher ratingsreflect a continued improvement of the political climate in the country whichhas strengthened the RF economy and favorably impacted on the economicprospects and political flexibility. As a result, RF economy is becoming lessdependent on the situation in oil markets currently going through an unstableperiod. Moody’s hasupgraded the Russian Federation’s rating by two ranks in one go – from B2 to Ba3 in forex and fromB1 to B3 in the local currency. The forecast for all ratings isstable.

The situation in theinternational financial markets

Negative movements of the US macroeconomicindicators, such as sales and industrial output, testifying to a decliningeconomic growth rate of the world’s largest economy, have forced the US Administration to moderateits monetary and credit policy. The Federal Reserve cut the federal funds rateto 6 percent per annum in early January, also reducing the discount rateinitially to 5.7 and later to 5.5 percent per annum. These steps, however,failed to produce expected results. On March 20, the Fed’s Board of Directors cut the basicinterest rate on short-term bank loans by another 0.5 percent to 5 percent perannum. The investors had been expecting an interest rate cut, but under theexisting economic conditions many of them thought that a reduction by half apercentage point was inadequate.

Similar criticism was leveled at theCentral European Bank which, on March 30, adopted a resolution on retaining therefinancing rate at 4.75 percent per annum. An unexpected announcement the USFederal Open Market Committee made on April 18 on slashing the federal fundsrate from 5 to 4.5 percent pushed the world trading sites up. Thus, forexample, NASDAQ grew by 8.1 percent immediately on the day the announcement wasmade. However, such actions failed to reverse the adverse trends and, to avoidthe danger of recession, the Central Banks of developed countries continued toreduce indicative interest rates. The Federal Reserve once again, on May 16,reduced the interest rate by 50 basis points to 4 percent. On June 27 the FOMCfurther cut the rate by 0.25 percent to 3.5 percent Thus, the rate has declinedduring 6 months from 6.5 to 3.75 percent – the minimal value over the last 7years. The US Federal Open Market Committee, at a session held on August 21,took a decision to reduce the basis interest rate for the sixth time since thebeginning of the year. This time it was cut by a further 0.25 percent to reach3.5 percent – theminimal value since April 1994.

The collapse of the World Trade Center onSeptember 11 and expectations of retaliation from the US Government led to ameltdown of the world’skey markets, while no trading took place at the NYSE from September 11 to 17.The week of September 17 to 21 witnessed a substantial drop of the US stockmarkets: DJ lost 7.68 percent, NASDAQ – 9.9 percent and S&P 7 percent,insofar, S&P closed below 1000 points level on September 20. On September17 the Federal Reserve once again cut the federal funds rate by 50 basis pointsto 3.0 percent. To support the euro-zone economy, the ECB cut the interestrates by 0.5 percentage points to the level of 3.75 percent, with the CentralBanks of other countries also reducing the key rates. The Bank of England alsocut the key interest rate in Great Britain by 0.25 percentage points to 4.5percent.

OnOctober 2, the US Federal Reserve once again reduced the key interest federalfunds rate by another 50 basis points to 2.5 percent – the minimal level since 1962. Inresponse to the rate cut - the ninth since the beginning of the year–the main stock indiceswent up: DJIA grew by 113.76 points (1.3 percent) to 8950.59, the NASDAQcomposite –got heavierby 11.87 points reaching 1492.33. However, the expected reversal still failedto materialize. In November, the Central Banks of the countries playing the keyrole in the world economic system once again cut the interest rates. The USFederal Reserve took a decision on November 6 –the tenth during the year– to reduce the rate,this time to 2.0 percent. As a result of this, Dow Jones - the key stock index– got by 1.6 percentheavier, while NASDAQ – by 2.3 percent. The Bank of England cut the key rate in GreatBritain by 0.5 percent to 4.0 percent. On the same day the ECB also cut the keyrate from 3.75 to 3.25 percent. In response to these measures the All-Europeanstock index FTSE Eurotop 300 went up by 1.17 percent reaching 1240.71, DJ EuroStoxx 50 index – grewby 1.83 percent to 3699.62 points. FTSE 100 - the British stock index– increased by 0.18percent to 5225.5 points, while the French CAC-40 gained 1.36 percent reaching4554.56. DAX - the key German stock index – gained 1.32 percent reaching4924.80 points. At the last FOMC session held in 2001 the federal funds rate inthe US was further reduced by 25 basis points to the level of 1.75 percent.

It should be noted that the EuropeanCentral Bank did not make such dramatic interest rate cuts. The ECB eased itsmonetary policy with reluctance, fearing this could result in acceleratedinflation.

The announcement about Enron’s bankruptcy of – major US trader in the gas andelectric power market –came as one more shock for the world market. The energy giant collapsed due tointra-corporate machinations as a result of which whole economic sectors– energy, banking,insurance and telecommunications - suffered. According to expert evaluations,the losses suffered by insurance companies alone shall amount to over $2 bln.Enron’s financialrelations with other companies were so complicated that the exact amount ofdebt still remains unclear.

The company balances show about $13 bln ofdebt, however, according to expert assessments, the total liabilities may be upto $40 bln. However, it should be noted, that the fact that the company hadreached agreements with its key creditors on commencement of thecompany’s restructuringprevented the stock indices from collapsing.

Corporate news

2001 was, overall, a favorable year for theRussian companies. Russia’s changed image and its higher ratings had a beneficial effect onthe activities of national corporations. Many Russian companies floated theirdepositary receipts on the world’s major trading sites. It is noteworthy that the shares of thetelecom and energy companies became the market’s locomotive at the year - end.The oil yielded its positions due to the unfavorable situation in rawmaterials markets. Among negative developments one should mention a bignumber of scandals and legal proceedings major Russian corporations wereengaged in.

Certain steps were made in 2001 to reformthe natural monopolies – Gazprom and RAO UES. Thus, The RF President set up a commissiondesigned to liberalize the domestic market of Gazprom shares. Theliberalization measures are expected to include an increased share of foreigninvestors in the Gazprom charter capital, launching the company’s securities in the RTS and theMISEX. At that period the Moscow Stock Exchange (MSE) was practically the onlysite where this issuer’s shares were quoted (see above). The market took the news aboutthe event with a lot of enthusiasm and a result of the second week in April thequotations for the gas concern’s shares surged at the MSE by about 21 percent. Insofar, theoperators’ activitydramatically increased: the Gazprom shares turnover amounted to about $55 mlnfor one week, exceeding that of RAO UES – the most liquid company in theRussian securities market – by about two-fold.

In May, the company’s Board of Directors elected a newBoard chairperson –Alexei Miller, who had previously held the position of the deputyminister for energy. Launching of irreversible reforms at the gas monopoly wasexpected after the removal of Rem Vyakhirev, the head of the concern. The flyin the ointment proved to be a scandal related to the seizure of 2.3 percentof Gazprom shares owned by the UFG company and deletion from the voting ballotsof four out of the five candidates nominated by the minority shareholders.These developments, coupled with the register closure on May 4, led to a dropin the quotations for the gas monopolist’s shares in mid-May.

A commission for reforming the RAO UESenergy holding was also set up in spring. The company’s restructuring plan and that ofcreating a free market for electric power enhanced major producers’ interest in the shares of theregional energy joint stock companies. The Kubanenergo, Tomskenergo andBelgorodenergo shares have been actively bought up lately. And MikhailKhodorkovsky, YUKOS’head, has publicly stated his interest in the power sector. In addition, YUKOShas become one of the founders of the Trading System Administrator which is tomanage the electric power market.

Computed according to the IAS, consolidatednet profit of the RAO UES energy holding in the first half of 2001 grew frombelow 300 mln rubles (for the first six months of 2000) to 841 mln rubles.

A conflict between Mosenergo and its majorshareholder RAO UES led to a top management reshuffle at the regional energycompany. However, excellent financial performance in the first half of the yearprevented the Mosenergo shares from plummeting. According to the RussianAccounting Standards, at about 2.7 bln rubles, the corporation’s net profit increased 6-foldcompared with the same period of the previous year.

Sibneft on several occasions surprisedmarket participants by its vague actions which generated many rumors and scaredoff potential investors. However, the rate of return on its shares in 2001 offset all therisks.

In the first half of 2001 Sibneft posted anet profit of $613 mln, sales - $1.663 bln, EBITDA – 871 mln (according to GAAP). Thecompany’s net profitfor the year is expected to amount to $1.1 bln (before dividend payments) withEBITDA to climb to $1.6 bln and sales at $3.3 bln. The total amount of dividendwas about $900 mln (to the tune of 80 percent of net profit). Thus, the oilcompany’s shares provedto be one of the most profitable instruments of the Russian capital market. Therate of return, taking into account the divided paid and the growth inquotations, exceeded 215 percent. For the sake of comparison: as a result of2000 LUKOIL paid 19 percent of its net profit in dividend, Surgutneftegaz– 4.1 percent. Inmid-October, YUKOS announced payment of interim dividend for 2001 amounting to13.3 percent of the company’s net profit for the first half of the year.

Computed according to the RussianAccounting Standards, net profit of OAO Rostelecom for 9 months of 2001 went upto 1.8 bln rubles compared with 0.9 bln. rubles for the same period of thepreceding year. Sales during the above period increased from 12.5 bln rubles in2000 to 14.3 bln. rubles. According to the company’s report, bigger sales are by 80percent due to the expanded volume of the services provided and by 20 percent aresult of the changes in tariffs. The EBITDA margin for the report period stoodat 54.3 percent, which was 5.4 percent higher than for the same period of thepreceding year. As a result of 2001, Rostelecom plans to increase its netprofit to reach 2.0-2.5 bln rubles compared with 1.03 bln rubles in 2000. Thecompany’s improvedfundamental indicators were enthusiastically welcomed by the market. After thefinancial performance indicators were announced the prices of Rostelecom shareswent up by almost 1.5 times in November.

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