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The considered scenarios of macroeconomic development in 2000 testify that inflation will be between 17% to 35%. The key factor affecting the Government’s and the RCB‘s capability to limit inflation is the dynamics of prices for main export commodities. The calculations show that a decline of export price index at one percentage point leads to the growth in inflation rate at 1/3 of percentage point.

The other important factor – the loans of international financial organisations – plays a minor role. Even if there were no external financing, the inflation rate in 2000 would be lower than in 1999 and would not exceed 27%.

S. Arkhipov, S. Drobyshevsky

Financial Markets

The government securities market. On February 11, 2000 the Russian Government and the London Club of creditors reached the agreement to write off 36.5% of the former USSR debts and accomplish the restructuring of the other parts of the debts. By early February 2000 the total Russian debt to the London Club’s members stood about $31.8 bln. According to the agreement, in the second quarter of 2000 at the latest the Russian Government has to issue two tranches of eurobonds worth a total of about $21.1 bln. The capital amount (PRIN) will be converted into eurobonds with the time of duration of 30 years, coupon payments – two times a year, grace period – seven years. During the first period the interest rate by the eurobonds was fixed at the level of 2.25% annualized, during the second period – 2.5% annualized, between the second to seventh years – 5% annualized and for the following years – 7% annualized. Arrears of interest (IAN) will be converted into eurobonds with the time of duration of 10 years and the coupon rate is 8.25% annualized.

It is necessary to note that the agreement is significantly worse than expected (it was assumed that the volume the debt to be written off would range between 50% to 70%). Even if all of creditors of the former USSR (except the owners of fourth and fifth tranches of Minfin bonds) agree to accomplish the restructuring of the debt under the terms that correspond to the agreement between the Russian Government and London Club, during the forthcoming seven years the annual external payments by the former USSR’s debt will be make up over $8 bln. (see Fig.1). Obviously, it will be very problematic to pay out such significant sums by the external debts. Thus, the aim to reach a radical drop in the burden of external debts was not reached.

Meanwhile, the results of negotiations have a positive impact on dynamics of quotations of the Russian securities (see Fig. 2 and 3). In the second decade of February the prices for short-term Minfin bonds and eurobonds went up by 3–5 percentage points on average and stabilised at a new level. At the same time, the prices for long-term bonds remained practically constant or went down. The decline was induced by investors’ expectations of growing supply of the securities at the market as soon as the restructuring would have been over.

Figure 1.

The schedule of payments related to the Russian foreign debt in 20002028.

Source: Brunswick Warburg.

Figure 2.

Figure 3.

In February 2000, at the market for ruble government securities (GKO and OFZ) one could note the continuous tendency to decline in the level of the average yield to maturity. In the second half of the month the yield to maturity of long-term bonds did not exceed 35–40% annualised, and the yields of short-term OFZ (matured in 2000) – 15–20% annualised. Thus, considering the inflation forecast for this year the OFZ yields in real terms were actually at zero level.

On February 23, 2000, for the first time since August 12, 1998, the government securities, namely OFZ No. 25022, were redeemed at the total sum of 11.5 bln. rubles. On the same day the Russian Ministry of Finance held on auction on placement of two new tranches of short-term government bills (GKO). GKO No. 21138 (the volume of tranche 2.5 bln. rubles, the date of maturity – September 6, 2000) were placed only among non-residents, which have funds at the ‘C’-type accounts in the Russian banks, GKO No. 21139 (2.5 bln. rubles, the date of maturity – May 31, 2000) were placed among both residents and non-residents.

The initial demand amounted to 11.66 bln. rubles, the placed volume – more than 3.5 bln. rubles by face value, the gain of the Ministry of Finance – about 3.4 bln. rubles. The non-residents participating at the auction determined an extremely low level of yield to maturity on satisfied claims as well as in December 1999. Thus, the average-weighted yield to maturity on GKO No. 21138 turned out to be negative (-0.54% annualised). Remarkably enough fact, investors-residents bidded low prices, and the average-weighted yield to maturity on GKO No. 21139 exceeded 20% annualised.

Stock market. Between January to February 2000, the Russian stock market demonstrated rather sharp fluctuations of quotations. A number of multifarious factors entailed the absence of stable trend in stock prices’ dynamics. The level reached by the RTS Index in mid-January was 200 points. However, by late January the index dropped to the level fixed at the very beginning of 2000. Hence, in January the RTS Index fell from 177.71 to 172.31 points, i.e. by 3.04% (see Fig. 4).

The same situation was observed at the Russian stock market in February 2000. During the first half of the month the RTS Index was growing. Thus, in particular, on February 9, it reached 196.64 points. Nevertheless, in the second half of February there was a correction in prices. In all, in February the RTS Index dropped from 172.31 to 170.93 points, i.e. only by 0.8%.

Figure 4.

Despite of the absence of a stable growth in the Russian stock prices, between January to February 2000 a significant increase in the total trading turnover was observed at the market. In particular, in January the total turnover in the RTS made about $489.5 mln. In February the respective index dropped to $441.5 mln. The RTS total turnover fixed in February was in 4.3 times superior to the respective index registered in February 1999. Thus, the growth in investors’ activity over the two last months testifies to the fact that the level of risks in Russia has appreciably dropped.

A notable feature of February was the change in prices for the Russian blue chips. During the last months, the dynamics of the most liquid stocks mainly coincided with the RTS Index’s dynamics. Some exceptions was the fall of prices for individual companies’ stocks against the general growth in blue chips’ quotations resulted from a threat of infringement of shareholders’ rights or due to some other serious reasons (for instance, the fall in stock prices of ‘Surgutneftegaz’ at 8% in January 2000). In February, the Russian liquid stocks split into two groups. Such a split cannot be attributed to the mere fact of the companies belonging to different branches of economy (see Fig. 5). In January 2000, the most significant growth was fixed by stocks of ‘Megionneftegaz’ – 41.4%, ‘Rostelecom’ – 28.1% and ‘Sberbank of Russia’ – 14.8%. At the same time it was stocks of ‘Irkutskenergo’ – -25.1%, ‘Surgutneftegaz’ – -13.1%,. ‘LUKoil’ – -10.8% by which showed the most appreciable drop.

Figure 5.

In February 2000, there was no significant change in the structure of trades in the RTS. In late February, the total share of the six most liquid stocks was about 79.2% of the overall turnover in the RTS against 81.8% in late January. During the third week of February, the share of RAO ‘UES Russia’ stocks in the total volume of trades was about 35.2% (36.8% in January), ‘LUKoil’ stocks – 15.43% (11.43%). The composition of leading stocks by their share in the total turnover experienced certain changes,. particularly, the share of ‘Rostelecom’ stocks grew from 3% in late January to 9.3% in late February.

In February 2000, the main factors which influenced the situation at the Russian stock market were as follows: firstly, on the eve of the presidential elections investors intensified their speculative operations, which was proved by a sharp growth in turnovers at the leading stock exchanges. Nevertheless, in spite of a high probability of V. Poutin’s triumph, the traditional pre-election rally at the stock market has not still started. That fact is most likely to be resulted from the uncertainty with respect to the foreign investors’ two major concerns:.they are uncertain whether the future Russian President maintains the course towards the market reforms, and whether he is in favor of protecting investors’ rights, and if so- to what extent. The second problem implies a high risk of the deterioration of relations between Russia and developed countries, particularly in the light of ongoing military operations in Chechnya.

Secondly, as it was mentioned above in the first half of February the Russian Government and the London Creditors Club reached the agreement to write off 36.5% of the total former USSR debts converted into the PRIN and IAN bonds, and to accomplish the restructuring by other share of the debts (for details see the section on the government securities market). Despite of the fact that investors consider the results of negotiation ambiguously, the adjustment of the debt problem between Russia and the biggest private creditors makes the chances for the renewal of the IMF’s crediting higher. Moreover, concrete parameters of the write-off and restructuring of the debt allow Russia to shape its position at the negotiations between the Government and the Paris Creditors Club scheduled for autumn 2000. Thus, the Government’s policy aimed at withdrawing Russia out of default status should allow restoration of investors’ trust in the Russian financial markets and the country’s comeback to international capital markets.

Thirdly, the agreement between the Russian Government and the London Creditors Club per se has encouraged Standard & Poor’s to increase the rating of the Russian eurobonds and the Minfin bonds from CCC to CCC+ ( the one that Indonesia currently has). Nevertheless, this increase in credibility estimation practically did not change the Russian financial markets’ investment attractiveness, because, according to Standard & Poors, Russia turns out to be slightly ahead of Dominican Republic (SD) in terms of reliability.

Fourthly, in February 2000, international oil prices continued to grow. Between January 31 to February 28 the price for future contracts for March 2000 for Brent Crude Oil at the NYMEX grew from 26.84 to 28.47 dollars per barrel, i.e. by 6.1%. Thus, since March 1999 when the OPEC countries decided to introduce restrictions on oil production and sales, the international oil prices grew about 3 times. Even if in March 2000 the OPEC members actually soften their constraints, the high international demand for oil would not give any ground to envisage a sharp drop in oil prices during the nearest months. Such a demand is a result of the exhaustion of petroleum resources in developed countries because of a severe winter season

In late February, the favourable situation at the international oil market allowed the Russian Government to increase the export duty from 15 to 20 euro per ton on oil and from 10 to 15 euro per ton on diesel oil effective in mid- April 2000. Thus, investors regard the growth in oil prices both as a factor that increase the Russian oil companies’ investment attractiveness and as a favorable precondition for an improvement of the situation in the sphere of budget revenues.

Fifthly, in February 2000, the situation at the international financial markets had a different impact on the Russian stock market. On the one hand, in early February the US Federal Reserve increased its discount rate by interbank overnight loans by 0.25 percentage points to 5.75% annualized. That decision was expected at the markets (see the IET report for January 2000) and did not lead to any significant fluctuations in securities’ prices. Following the FRS, the Bank of England increased its discount rate from 5.75% to 6% annualized. On the other hand, one could note an interesting tendency emerged in the USA and the other developed markets during the last months. Many investors consider the stocks of high-tech companies as the segment of the stock market on which the effect of the growth in the discount rate is marginal. As a result, prices for the stocks of capital-intensive companies dropped, while the prices for the stocks of high-tech companies grew. For instance, between January 31 to February 28, 2000 the NASDAQ Composite Index that includes a big number of high-tech companies grew by 19.2%. At the same time, the Dow Jones Industrial Average Index that includes mainly capital-intensive companies fell by 8.2%.

Thus, in February 2000, investors at the emerging markets received quite contradictory signals about changes in stock prices from developed markets (see tab.1). It is most likely that the Russian investors who traditionally were guided by the Dow Jones’ dynamics in this sense were not an exception.

Table 1.

Dynamics of the Foreign Stock Indices

as of February 28, 2000

value

the change in value during the last week (%)

the change in value during the last month (%)

The Dow Jones Industrial Average (USA)

10038.65

-1.77%

-8.24%

Bovespa Index (Brazil)

17542.70

-0.89%

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