RusEnergy

VIEWPOINT January 2006 RYE, MAN & GOR Securities – Whatever political analysts and economists may say, investors are bound to be pleased with Russia in 2005. The RTS Index has risen from 600 to over 1100 points in 12 months, making Russia the best performing market of major significance in the world this year. Where do we go from here? From our current vantage point, there are two obvious market landmarks in 2006. The first is Gazprom share market liberalization, which will go live in mid-January immediately after Russia’s extended New Year holidays. It would be hard to find anyone less suited to play Santa, but Vladimir Putin was clearly trying himself in that role on the day before Christmas Eve when he signed legal amendments to the law “On gas supply”, which liberalize trading in Gazprom shares. There is no guarantee that stock prices of the gas giant will rise quickly in the new conditions: there was almost no price reaction to the Friday news on the St Petersburg Exchange, and we are agreed with many analysts in finding Gazprom generously valued at current levels. It looks as if the RTS will continue its current arrangement, trading via St Pete, but arrival of the stock on the MICEX will make it more mainstream for onshore investors. As we calculate (see Oil in this Weekly), the current, official ADS volume plus over 20% traded in gray schemes mean that foreigners get access to an extra 15% of the company’s stock thanks to the liberalization. The other obvious landmark for 2006 on the share market is the Rosneft IPO, which is supposed to happen next summer. Indications in recent months suggest ballpark value of the IPO around $10b. The Gazprom and Rosneft actions clearly have big potential for expanding Russian share trading volumes. And foreign investors, who buy these stocks, will presumably also be interested in diversifying their Russia risk by investment in other companies, spreading the benefit across the market (some brand new opportunities on the RTS have been presented in our recent series of stock metrics). However, we do not see triumphant progress as guaranteed in 2006, as least not based on Gazprom and Rosneft alone. The main problem could be clumsiness in implementation and presentation. We have seen instances of this even before the New Year begins. On the same day as Putin gave investors the gift of free trading in Gazprom, Russian TV showed the company CEO, Alexei Miller, giving a demonstration of how gas supplies to Ukraine will be shut off from January 1 if agreement on major price rises is not reached. The implications of such a development for Gazprom and its European customers, who receive most of their gas across Ukraine, would be dire. The spectacle was both unwise and gratuitous on a day, when investors and international media should have been focused on a positive image of Gazprom. Also last week Russia’s Federal Service for Financial Markets warned that it may reduce the limit on share capital that can be go abroad in depositary receipts from 40% to 30%. The idea is to foster growth of an onshore market, but (again) the timing was bad: Gazprom said last week that it will seek to increase the allowable volume of its depositary receipts to the maximum next year. Investors, who are now looking at Rosneft prospects in 2006, will also have been worried. Popularity of “government-backed” stocks has been evident on the RTS in recent months. But the kind of strategy collisions just described is further proof that a proper stock market has to be dominated by private companies.