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According to Moody’s, the new ratings reflect commitment of the Russian Government to prudent tax policy and debt management, significant improvements in debt-to-liquidity ratio, creation of a Stabilization Fund intended to cushion the impact of a possible decline in the raw materials market, and reduced political risks at this country. The new ratings had a tremendous impact on all segments of the Russian financial market because they made it possible for a lot more foreign investors to invest in Russian financial assets.

International financial markets

All in all, 2003became the year of growth in global stock markets, especially in the United States and the European Union. However, quotes also moved down at the markets of the First World’s countries and developing countries over the year. Quotes fell in January last year in the US, European and Asian markets. The US stock market got discouraged by uncertainty regarding Iraq and the likelihood of warfare in the country. In addition, the decline in basic stock indices was governed by a unfavorable forecast for technology sector development, decline in production of the US economy, substantial foreign trade deficit and decline in consumer confidence index. European stock markets were also characterized by a negative growth in indices, which made investors concern about growth rate of the European economy and global economy as a whole.

The decline in the US market continued till mid-March, when US indices reached their historic minimum: on March 11DJIA was 7524,06points and high-tech NASDAQ was 1271,47points at closing. Basic European markets were declining as well. European indices dropped to their minimum over the last six years. Finally, in Japan, NIKKEI dropped below 8000points to reach its minimum since January 1983, 7862,34points. In March, the European Central Bank reduced the basic interest rate to 2,5%, while the US Federal Reserve System maintained the basic interest rate at 1,25%, which is the minimum rate over the last 40years. A marked recovery was registered at the leading global markets upon the beginning of the warfare in Iraq, DJIA grew to its maximum since October 1982, and NIKKEI reached its maximum over the last four months.

In April, the American stock market indices grew slightly regardless of any visible progress in the US economy. From March 31till April 30, DJIA and NASDAQ grew by 487,9 (6,11%) and 123,1 (9,18%) points correspondingly. European stock market indices also grew up: FTSE100by 8.65% in Great Britain, DAX–30by 21.38% in Germany, and CAC–40by 12.80% in France. The situation in Iraq became one of the key driving factors. Upon the news f assault on Baghdad in April 7, the European indices grew to their previous points of the past trimester. However, unfavorable situation in the US economy and, in particular, the crisis at the labor market pushed down the US stock market.

In May through August, the US stock market was dominated by positive index trends. From April 30to August 29, DJIA and NASDAQ grew by 11,03% and 23,64% correspondingly and reached 9415,8and 1810,45points. Particular emphasis should be placed on other growth factors like the July 1% decline in the US basic interest rates, which followed by a statement of the Federal Reserve System to the effect that it would be maintained unchanged within a long-term period, published macroeconomic statistics supporting a gradual progress in the US economy (in particular, reduced unemployment rate and industrial output growth), as well as favorable corporate performance figures in the 2nd quarter of 2003. The EU market also demonstrated a positive movement which was similar to that in the US market. The growth in European indices was governed mainly by stock prices of export-oriented companies benefiting from the growth in the US economy. However, the European indices grew at slower rates against those in the United States, due to the fact that the European economy was recovering slower than the US economy. In particular, FTSE 100growth rate accounted for 5,99%, DAX–30 – 18,44%, and CAC–40 – 12,11%.

The US stock market was then dominated by a positive trend in quotes movement in spite of a temporal decline in prices. Late in September, the basic US stock indices demonstrated a zero growth against increased unemployment in the United States and a markedly weakening US dollar against other major currencies. Between October and November, the US stock quotes continued to grow moderately partly in response to published statistics on new macroeconomic figures indicating economic growth, and positive financial performance in the corporate sector. In December 2003, the US stock market movement was governed by the same factors as in November 2003. The stock indices grew positively in spite of various unfavorable factors affecting the market, namely weakening of the US dollar at the global currency market and high oil and gold prices. All in all, DJIA and NASDAQ indices grew up by 21,45% and 44,66% correspondingly.

The European stock markets were marked by the fact that they continued to follow the movement of the US stock market in absence of any internal news. In addition, due to the fact that the EU economy depends on the US economy, the quotes of export-oriented companies were effected by the situation at the foreign exchange market. It was this factor that governed the movement of European indices between September and November: the market value of export-oriented companies was instantly effected by a marked strengthening of the euro against the dollar, which resulted in stock index decline. However, high oil prices promoted growth in oil stock prices of European oil companies at year-end 2003, which pushed the stock indices upwards. In 2003, basic stock indices of the EU countries grew as follows. FTSE100grew by 11,5%, DAC–30by 27,7%, and CAC–40by 10,46%.

Figure 28

Dow Jones and NASDAQ Movement
in 2003 (December 31,2002= 100%)

Global oil market

The global oil market was characterized by a visible volatility throughout the entire year. However, a few periods of a well-marked growth and decline of black gold prices can be distinguished. Brent oil grew constantly in price since early in the year to reach 34,93US dollars/barrel by March 11, thus increasing by 4,87US dollars (16,2%) against January 13. Such a substantial price rise can be explained by strikes held in Venezuela and Nigeria, ultimate crude oil reserves in the United States (lowest over the last 28years), and the beginning of warfare in Iraq. Even an OPEC’s decision of February 1on increasing oil output quotas by 1,5ml barrels daily failed to promote any decrease in oil prices.

The market, however, collapsed over the following two weeks: by March 24, Brent oil dropped by 9,35US dollars (–26,77%), 25,58US dollars per barrel. The collapse was followed by a short-term correction which gave way to further decline in global prices. At closing on April 30Brent oil was worth 23,22US dollars per barrel at the world’s market, thus it dropped to 2,36US dollars (–9,23%). The situation in Iraq and especially news on the interallied troops marching in Baghdad was considered as a quick settlement of the conflict. In addition, the market also went down due to cessation of disturbances in Nigeria.

Figure 29

Brent Oil Global Price Movement in 2003

Between May and early in August, the global oil market moved upwards in general. By August 11, Brent oil prices raised by 7,36US dollars (31,7%) by August against April 30despite unchanged OPEC’s quotas (which were expected to be reduced in May), shrinkage of crude oil reserves in the United States, strike in Nigeria, tropical hurricane at the Gulf of Mexico and unstable operation of one of the major oil refinery in Iraq (in Basra region) and Kirkuk–Djeikhan pipe line.

A marked fall in oil prices to 25,5US dollars per barrel in September (on September 22), which was caused by investors’ wish to realize their profit, as well as replenished oil reserves in the United States by way of increased oil import, was followed by a new rapid growth. Upon the reduction of OPEC’s quotas on oil production and import by member countries, Brent oil price was increased by 5,72US dollars (22,43%) at closing on October 16and was traded at 31,22US dollars per barrel. This was followed by a certain fall in quotes reaching 27,46US dollars per barrel by late October. However, further destabilization of the situation in the Middle East due to acts of terrorism in Iraq, Saudi Arabia and Turkey led to a growth in political risks and, as a consequence, increased oil prices. On November 20, Brent oil was traded at 30,12US dollars per barrel at the world’s market.

In December, a set of factors boosted the price: the OPEC did not change oil production quotas for the member countries and the US reserves of oil and oil products diminished in bulk. However, by late in December the prices fell sharply for a day due to a statement of the Minister of Petroleum Industry of Indonesia (OPEC Chairman since January 1, 2004) on too high oil prices and the need to raise quotas, which did not meet the market expectations of lower quotas. The Brent oil price dropped by 2,25US dollars within a day from December 22to 23, from 31,02to 28,77US dollars per barrel. All in all, the Brent oil prices went down by 2,99% within a period between January 13and December 30, which accounted for 29,16US dollars per barrel at year-end 2003.

There were several mechanisms by which high oil prices in the global market effected the movement of the Russian stock market during the year. Firstly, high prices of oil and energy sources promoted a higher amount of foreign currency revenues of export-oriented companies which had to convert it into rubles. Under these conditions, there was registered an upsurge of liquidity at the Russian banking sector, which entailed the demand for the shares of domestic companies and, as a consequence, boosted their market value. Secondly, the strengthening of the ruble due to an increasing foreign currency inflow made the US dollar less attractive as an alternative asset in favor of the demand for shares. Thirdly, under the circumstances of rising world’s oil prices, the shares of oil companies represented an attractive instrument for investment due to their efficient financial performance and the expected increase in market value and dividends. It should be noted, however, that the impact of this factor on oil shares may be evened because the petroleum industry is likely to have to take a heavier tax burden and, as a consequence, yield less revenues and dividends in 2004.

Corporate news

Marked improvements in efficiency of several Russian corporations was reflected in upgraded long-term credit ratings or revision of the existing rating in favor of further upgrade. In January 2003, Moody's Investors Service granted for the first time the foreign currency rating 2and basic rating 1on NK YUKOS (outlook is Stable). It is noteworthy that the basic rating of the company exceeded the sovereign rating on the Russian Federation, 2, which is accounted for an exceptional performance of the company. However, there were key problems to note, namely excessive concentration of equity capital, dependency on oil prices in the world markets and indefinite long-term development plans.

A month later, Standard & Poor’s raised the long-term credit rating on VolgaTelekom from B– to B owing to a consolidation of fixed communication operators of the Volga Region, which resulted in improvement of company’s position in the market and business performance. In addition, Fitch raised the individual rating on Sberbank of Russia from D to C/D, while other ratings remained unchanged (long-term rating – BB–, short-term rating – B). The upgraded rating reflects an improved efficiency of the bank after 2000to the level which meets or outperforms other Russian banks.

In March, Standard & Poor's announced a revision of the rating on Sibneft from Negative to Stable, thereby confirming B+ on the long-term credit and on priority unsecured liabilities of the company, and upgrading its national rating from ruA+ to ruAA–. Furthermore, Standard & Poor's raised the long-term credit rating on the Russian diamond-production company Z ALROSA from – to owing to the fact the company obtained a five-year quota on export of diamonds in March 2003. The outlook is Stable.

In October, Moody`s granted the long-term rating 2and 3on unsecured public foreign exchange offerings on LUKOIL. The outlook is Stable, while the long-term credit rating on Rostelekom was raised by Standard & Poor`s from – to with a positive outlook.

In October through December 2003, many companies published their financial reports in 2003, of which the following should be noted.

Net profit of NK LUKOIL in the second half of 2003amounted to $2,36bln US dollars against $840ml US dollars in the first half of 2002, according to US GAAP. Profit before interests, taxation, depreciation and amortization reached $3,18bln US dollars in the period under review against $1,66bln US dollars over the same period of the previous year. Oil production in the second quarter grew by 3,5%, which was doubled against 2002.

NK YUKOS also published its report on the first half of 2003according to the US GAAP standards, indicating that sales proceeds and other earnings generated from the core business accounted for $7,7bln US dollars in the first half of 2003against $4,5bln US dollars in the first half of 2002. Earnings before interests, taxation, depreciation and amortization (EBITDA) over the first half of 2003and previous year accounted for $2,9and $1,68bln US dollars correspondingly, while net profit amounted to $2,22bln US dollars in the first half of the year against $1,22bln US dollars in 2002.

Late in October, Rostelekom published its financial reports in compliance with the international standards of financial reporting. Consolidated earnings of Rostelekom over the first half of 2003grew by 10,6% according to the international standards of financial reporting. EBITDA accounted for $175,8ml US dollars over the period, thus increasing by 1,7% against the first half of 2002. Net profit grew by 42,1% against the previous year and amounted to $29,7ml US dollars.

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