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Growth in Foreign Reserves (%)






















































































S. Arkhipov, S. Drobyshevsky

Financial Markets

The government securities market. The resignation of the Russian President Boris Yeltsin and the appointment of Vladimir Poutin as the acting President, the re-scheduling of the presidential elections for late-March 2000 had had a positive impact on the situation at the markets for the Russian government securities (see section Stock Market). In January 2000 the quotations of Minfin bonds grew up between 2 to 12 percentage points (see fig. 1). The most intensive growth was demonstrated by the 4th and 6th tranches of bonds, which should be matured in 2003 and 2006. Thus, the yields of Minfin bonds actually returned to the level observed on the eve of August 17, 1998 (between 17% to 40% annualised).

Figure 1.

In January 2000 the prices for the Russian eurobonds stabilised at the level, which guaranteed the yields to maturity between 17% to 21% annualised. That is within the limits of 67–83% of face-value (see fig. 2). It is evident, that facing current political risks and default risk, investors are not ready to accept a lower level of yields on the Russian sovereign debt. If there is no new serious shocks (a sharp fall in ruble exchange rate, a decrease in oil prices, an intensification of the tension between Russia and the West with respect to Chechnya), that level of yields will be in place until late-March, or until the presidential elections take place. The change in investment attractiveness of Russia heavily depends on election outcomes.

In 2000, the volume of interest payments on the Russian securities (eurobonds and Minfin bonds excluding the restructured 3rd tranche) makes a sum of $223.6 ml.

Figure 2.

Stock market. During early January 2000 the Russian stock market demonstrated a sharp growth in quotations. The level reached by the Russian stock prices in mid-January was last time observed in July 1998 (see Fig. 3). However, in late January the considerable correction in quotations took place at the market. The growth in stock prices, which continued during the last four months, was undoubtedly speculative. At the same time it should be noted that a significant growth in the foreign capital inflow testifies to the falling level of risks in the Russian economy.

In December 1999, the RTS index grew from 112.36 to 175.26 points, i.e. by 58.16%. Nevertheless it is necessary to note that on December 30 the index reached only 150 points. That corresponds to 33.5% of its increment from the very beginning of the month. Thus, the sharp growth of the RTS index from 150 to 175 during the cut trade session on January 31 is rather a technical effect than a real change in stock prices. Nevertheless, over the whole 1999 the RTS Index grew by 197.42%. Despite the fact that the RTS Index broke the level of 200 points in mid-January, during the month the index dropped from 177.71 to 172.31 points, i.e. by about 3%.

Figure 3.

In January 2000, the activity of the Russian investors grew significantly due to the arrival of a number of foreign portfolio investors at the market. In January the total turnover in the RTS made about $489.2 mln. Thus, in the last month the total turnover was at 71.4% superior to the respective index registered in December 1999 and at 157.8% superior to the average value of monthly turnovers for 1999 ($189.8 mln.).

In January 2000, the quotations of the majority of the Russian blue chips grew significantly, particularly, ‘Tatneft' – 59.26%, RAO ‘UES Russia’ – 44.02%, ‘Mosenergo’ – 35.35%, ‘Norilsky Nickel’ – 27.29%, ‘Megionneftegaz’ – 26.09% (see fig. 4). During the last month among the blue chips the only fall in quotations was experienced by the stocks of ‘Surgutneftegaz’ (–8.09%). That resulted from a high risk of violation of the oil holding shareholders’ rights due to the intention of ‘Surgutneftegaz’ top management to consolidate stocks. It is possible that this procedure will include an additional issue of stocks a subsidiary of OAO ‘Surgutneftegaz’.

Figure 4.

In January 2000, the growing investors’ demand for stocks did not result in a significant change in the structure of trades in the RTS. While comparing the trade volume’s structures noted during the third week of December 1999 and the third week of January 2000, one may see that in the latter case the shares of the three most liquid stocks in the total turnover slightly dropped. In particular, during the third week of January, the share of RAO ‘UES Russia’ stocks in the total volume of trades was about 36.80% (33.26% in December), ‘Surgutneftegaz’ stocks – 11.78% (14.69%), ‘LUKoil’ stocks – 11.43% (16.46%). Thus, in late January the total share of the three most liquid stocks was about 60% of the overall turnover in the RTS against 64.4% in late December.

In January 2000 the factors which influenced the situation at the Russian stock market were as follows: first, in January there was a notable decline in the level of political risks in Russia. The resignation of Boris Yeltsin on December 31, 1999, was likely to be the main political event in the end of 1999. The transfer of powers to the acting President V. Poutin in compliance with the Constitution stabilised the internal political situation in Russia, and the rating of Prime-Minister sky-rocketed. That shows that Mr. Poutin has such chances to be elected the President in late-March. The re-scheduling of the presidential elections on March 26, 2000, undoubtedly increases the Poutin’s chances. The appointment of M. Kas’anov as the single First Deputy Prime-Minister became an additional factor which increased the attractiveness of the Russian stocks market. The latter was due to the fact that Kas’anov has already become well-known to the biggest foreign investors.

Meanwhile, the assessment of market participants of the situation in the State Duma has not a single meaning. On the one hand, the present composition of the State Duma promises to be more co-operative towards the Government than expected prior to the elections. The reasons are a high share of MPs representing the ‘Unity’ block and the Union of Right Forces (see fig. 5). On the other hand, only a few experts had supposed that the pro-government factions ‘Unity’ and ‘People’s Deputy’ would collaborate with the Communist Party and the Rural Party on crucial issues. The conflict between big and small factions on the issue of electing the Speaker of the House and the assignment posts of the Duma’s Committees’ Heads is one of the crucial factors which affected the Russian stock market. The essence of the precedent is that the Duma majority demonstrated its ability to make important decisions while ignoring of small factions’ stand though it is the latter who regarded by many investors as advocates for further market reform.

Figure 5.

Second, on January 6, 2000, the international rating agency Moody’s Investor Service increased its rating of the Russian long-term borrowings in domestic currency from Ca to Caa2. The forecast of its rating of the Russian long-term foreign currency borrowings B3 was also increased from negative to stable. Among of the reasons explaining that fact, the agency singled out the improvement of general economic state in 1999 and the growth in tax revenues.

At the same time, the decline of political risks and some positive macroeconomic trends were not regarded as the reason for increasing the rating of the Russian foreign currency () and the ruble securities issued in order of GKO-OFZ restructuring () by the other big rating agency, Standard & Poor’s. Most likely, its decision would appear only after achieving any agreement between the Russian Government and the IMF and international creditors’ clubs.

Thirdly, despite the fact that the IMF mission visited Moscow in late January 2000, here are no grounds to envisage that Russia shortly will be granted with the next $640 mln. tranche of credit. The IMF mission was interested in both the Russian Government’s macroeconomic program (especially in spheres of monetary and tax policy) and in the implementation of the previous agreements between the Government and the IMF (for more details, see the IET report for December 1999). Nevertheless, as early as in the second half of 1999, in the process of planning of the external payments in 2000, the Russian Ministry of Finance did not rely on this tranche. At the same time it was implied that the key reason of credit isolation of Russia is not the Government’s progress on the macroeconomic field, but ongoing military operations in Chechnya and high political risks on the eve of the presidential elections.

The same reasons decrease the intensity of marathon negotiations between the Russian Government and the London Creditors Club on the PRIN and IAN bonds (the former USSR debts converted to securities) restructuring. In these circumstances, prospects on an agreement between Russia and the Paris Creditors Club in the near future are also vague.

Fourthly, in January 2000, international oil prices renewed their growth. Between January 5 to January 31 the price for future contracts for March 2000 for Brent Crude Oil at the NYMEX grew from 23.71 to 26.84 dollars per barrel, i.e. by 13.2%. It is anticipated that in March 2000 the OPEC members will prolong the limitations on oil extraction and sales. Should it happen the tendency to growth in oil prices at the international markets will continue at least during the first half of 2000. The petroleum resources of the biggest oil importers significantly dropped this winter. That entailed rather a high demand for oil. Thus, such a high level of oil prices will be a very important factor which will determine the growing investors’ demand for the Russian oil companies’ stock at least during the nearest six months.

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