Emerging Markets - Russia

Hello everyone. I have to admit I have not been on these forums for a long time. Excessive travelling and firy relationships come handily to mind as potential excuses.

As you may remember I do almost exclusively EMs now - as I like the volatility levels. Guess which stock in Top 10 biggest stocks in the world has ATM March 2007 volatility at 50%? Russian Gazprom. Imagine Exxon or Microsoft or Citibank doing 5-10% daily up or down. Normal trading day for GAZP RU/OGZD LI.

I suggest we start an EM thread here. Please let me know if this is of any interest to anyone.

I will start with my morning market comment here:



Russian Market Comment:

This seemingly dull summer market is actually at an important juncture where it can be easily tipped over in either direction. External equity sentiment is VERY NEGATIVE whilst internal liquidity is again at all-times high which is VERY POSITIVE. I will have to say something that you would not normally expect from a sales trader – stay on the sidelines to wait and see, It is exactly what Russian oil roubles seem to be doing right now - the balance of correspondent accounts at Russian commercial banks amounted to 443.3 billion rubles (about $16.41bn) as of the beginning of business on July 19.


Individual Russian Issues:

Rosneft - A U.K. court refused to suspend the listing of state-controlled oil producer Rosneft on the London Stock Exchange following a legal challenge brought by Yukos. Yukos said it will immediately appeal the ruling. Another “storm in a glass of water” – I will eat my hat if Yukos shareholders will get anything from Putin and Co,

I would not be surprised if Gazprom buys Centrica or something of the sort sooner rather than later – UK press is snapping at Gazprom which is normally a good indicator. This time, Gazprom, could lose its position as a secure and reliable supplier of gas to Europe over its failure to invest in its domestic gas network, the London-based Times said, citing the International Energy Agency. Gazprom funds currently spends on foreign acquisitions and export pipelines would be better invested repairing its leaking network of pipes and boosting gas production, the Guardian said, citing the IEA in a report on Russia's gas sector. Gazprom may be losing as much as ten billion cubic meters of gas a year through its leaking pipeline system, equal to a tenth of Britain's gas consumption, the newspaper said.

On a separate note, Russia's Nuclear Energy Agency and Gazprom may form a company to buy nuclear assets and then sell 20 percent of it in an initial public offering, Vedomosti said, citing three unidentified people familiar with the matter. Gazprom will participate in the project via ZAO Gazprombank, its lending arm, the Russian newspaper reported. Russia, the world's biggest gas producer, wants to free up more of the fuel for export as European energy needs grow. The country plans to build 40 new reactors by 2030 to boost nuclear power's share of electricity production to 25 percent from 16 percent now.

RAO UES - Russian Economy Ministry may suggest RAO Unified Energy System, the national power utility, sell its stake in one of its wholesale generation companies, Interfax said, citing an unidentified person at the ministry. The ministry wants Unified to sell the 75 percent stake it will possess in OGK-5, as the company is known by its Russian acronym, following an initial public offering expected to take place as early as the fourth quarter, Interfax cited the person as saying. The proposal is contained in an electricity industry reform plan that will soon be submitted to the government, the person told Interfax. The person didn't say when it would be submitted. Russia set up six wholesale generation companies as part of its restructuring of the power industry. Unified Energy plans to sell news shares of OGK-5 accounting for about 17 percent of the company to raise 50 billion rubles ($1.85 billion).

VSMPO-Avisma - Russia's weapons agency Rosoboronexport is nearing the completion of negotiations on buying a controlling stake in VSMPO, the world's largest titanium producer, Interfax reported, citing Rosoboronexport head Sergei Chemezov. VSMPO Chief Executive Officer Vladislav Tetyukhin said in May that Rosoboronexport will buy a controlling stake in his company this year.

Rambler Media Ltd. - the Russian media company providing Internet and other services said in a statement it completed the purchase of two Internet companies. Rambler bought 51 percent of Damochka.ru, a social network Internet company, and BannerBank, an online banner exchange company. Rambler didn't disclose the price it paid for the controlling stakes.

Rosneft GDRs will start trading on LSE today

Rosneft GDRs will officially start trading on LSE today. Rosneft shares appear fairly valued on DCF basis and expensive on financial and asset-based multiples. Rosneft shares are currently prices on 2006-07 PE of 19, or 70% premium to the average PE multiples of 11 for Russian peers and international oil majors. At the same time, Rosneft shares are priced at 40% premium to LUKoil per barrel of proven reserves and production.

I reiterate my $7.05 target price on Rosneft shares and Hold rating on the stock. I believe that Rosneft shares will trade in the range of $6-8 per share and are likely to post a slight decline in the near-term trading.

BANP RU shares offer upside ~60% to TP of $15/common and $10/prefs

BANP shares offer upside ~60% to our TP of $15/common and $10/prefs

BANP will be consolidated along with other Bashkirian oil sector assets into vertically-integrated Bashkirian holding company by year-end 2006

My TP based on asset-based multiples derived from Deloitte’s valuation of TNK-BP subs during their consolidation in 2005

Conergy (CGY GY) - BUY short-term

CGY is technically ripe for a bounce back to 50 as immediate target. We like the “hammer” on massive volume (circles) and a consequent intraday R/S resolution. Screaming BUY.

Russian equities - Morning Update - 20/07/2006

Russian Market Comment – 20 July 2006

External equity sentiment flipped from gloom and doom to VERY POSITIVE in an eye blink after Bernarke’s comments and earnings across the pond. That, coupled with all-time high internal liquidity (the balance of correspondent accounts at Russian commercial banks amounted to 498.1 billion rubles (about $18.41bn) as of the beginning of business on July 20) should put Russian equities on fire very short-term. It remains to be seen how strong the follow-through will be, Watch order book carefully,

U.S. stocks rose after Federal Reserve Chairman Ben S. Bernanke said economic growth is moderating, easing concern that the central bank will keep raising interest rates to curb inflation. International Business Machines Corp. and JPMorgan Chase & Co. led the advance after profit exceeded analysts' estimates. Bernanke's comments and the earnings reports overshadowed government data that showed consumer prices increased for a sixth straight month. In the after-hours, Apple Computer Inc. rose 8.4 percent after the official close of U.S. exchanges yesterday as sales of 1.33 million Macintosh computers exceeded the 1.25 million predicted by analysts.

Russia's gold and foreign currency reserves were at a record $255.7 billion on July 15, up from $253.2 billion on July 7, the Central Bank said in a press release. The country is awash with money, perceived to be stable politically by the West and has cash to pay off its remaining debts.



Russian Individual Issues:

This is perhaps the very end of Yukos - Gazprom has offered to buy a 20 percent stake in its oil subsidiary from Yukos, which “could help Yukos avoid bankruptcy”, Vedomosti reported. The choice of words is obviously very careful but you hardly need to be a psychic to realise what this REALLY means in Yukos saga. Yukos CEO Steven Theede received a letter from Gazprom expressing interest in Yukos's 20 percent stake in OAO Gazprom Neft, the newspaper said, citing Yukos spokeswoman Claire Davidson and an unidentified Gazprom manager. Davidson declined to give details, the newspaper reported. Gazprom may start talks with Yukos tomorrow, seeking a lower price than the $4.2 billion Theede set in his plan to avoid liquidation, Vedomosti said. Gazprom is concerned that it would have to pay more for the stake if Yukos is liquidated and its assets are auctioned off. The image of vultures circling round dying carcass somehow springs to mind.

On a separate, but hardly unrelated note, a creditors' meeting in Moscow later today will decide on the financial recovery of the company that was once Russia's biggest oil exporter, external management or its liquidation.

TNK-BP - Russia's Natural Resources Ministry said BP Plc's Russian venture may lose some of its operating licenses as the company has 30 percent of inactive oil wells, more than the 10 percent limit under Russian law.

Gazprom Neft: Gazprom seek to buy 20% stake from Yukos at $2.15/share. SELL

Gazprom has offered to buy a 20% stake in its oil subsidiary Gazprom Neft from Yukos, Vedomosti reported. Yukos CEO Steven Theede received a letter from Gazprom expressing interest in Yukos's 20% stake in Gazprom Neft, the newspaper said, citing Yukos spokeswoman Claire Davidson and an unidentified Gazprom manager. Gazprom Neft CEO Alexander Ryazanov told Vedomosti he wasn't aware the letter.

Gazprom may start talks with Yukos tomorrow June 21, seeking a lower price than the $4.2 billion Theede set in his plan to avoid liquidation.

Gazprom is hurrying up to acquire Yukos' 20% stake in Gazprom Neft to minimize its acquisition price and avoid its transfer to unfriendly hands. Gazprom is concerned that it would have to pay more for the stake if Yukos is liquidated and its assets are auctioned off, Vedomosti said, citing the Gazprom manager. The Yukos's 20% stake in Gazprom Neft is currently worth around $4.1bn at Gazprom Neft’s current share price of $4.30. However, Gazprom is ready to pay only some $2bn for this stake, or some $2.15/share, according to Vedomosti, citing the Gazprom’s manager.

Gazprom bought about 76% of Sibneft last year for more than $13.6 billion, or $3.80/share, and renamed it Gazprom Neft.


Thus news in NEGATIVE for Gazprom Neft’s share price, as Gazprom will obviously seek to acquire this stake as a substantial discount to its current market price, serving as new price benchmark for the Gazprom Neft’s market share price. Gazprom will argue that its acquisition price for 76% stake in Sibneft at some $3.80/share, have included some 40% control premium. Thus it would target considerably lower consolidation price for the remaining shares. Having acquired 20% stake, Gazprom will own 96% in Gazprom Neft and most likely will seek to buyout the remaining free float (at agreed with Yukos acquisition price), employing recently adopted amendments to the Russian corporate law, allowing controlling shareholders with a 95% stake to impose buyout terms on remaining shareholders. Thus, we believe that Gazprom Neft’s minorities are not likely to realize any appreciation potential in Gazprom Neft’s shares.


Sell rating on Gazprom Neft’s shares with TP of $3.80/share.

China, good to see you back - hopefully largely unscathed - from your adventures.

Nice analyses as always, but would I be right in thinking you've moved away from the Dark Side and now lean to a more Fundamental bias in your trading?

If you are more fundamental in your approach, is that just on the pro side of your workday (while still DS-ing your own account) or have you come out into the light completely?

TheBramble said:

China, good to see you back - hopefully largely unscathed - from your adventures.

Nice analyses as always, but would I be right in thinking you've moved away from the Dark Side and now lean to a more Fundamental bias in your trading?

If you are more fundamental in your approach, is that just on the pro side of your workday (while still DS-ing your own account) or have you come out into the light completely?

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TheBramble, hello mate, good to know u r well.

No I am a darksider to the bone, but you need to keep in mind that dark side works in liquid markets with liquid instruments. Russia is somewhat unique in that respect, as it has EXTREMELY liquid blue chips (Gazprom, Lukoil, less Surgut and RAO UES, some funny stocks like KAZ LN etc...), however the futures contracs on RTS Index (tradable in St Petersburg) or RDX and RTX indices (Wiener Borse) are complete and utter pants in liquidity.

Another thing is that the main reason for Russian mega rallies is Western perception of Russian Government as being mega stable and reliable. Also capable of paying off Russian debt which is a no brainer given the prices of oil, copper, nickel etc. That same government is a massive shareholder in issues like Gazprom, Lukoil and RosNeft. So when a Govermnet controlled company like Gazprom buys something somewhere you just buy that something! Hardly technical analysis.

I am not a big fan of fundamentals. What P/E is cheap and what is expensive? At present multiples RosNeft is 20% more expensive than Lukoil bit this "strategic" IPO is massively supported by the Government. If all you do is EBITDA number crunching, you should be constantly long PetroBras at the expense of Lukoil and Surgutneftegaz. Would you do that?

Russian Equities - Morning Update - 21/07/200

Trading ideas:

Lukoil just said it will choose a site for a new oil refinery by the end of the year as record tariffs make crude exports less profitable. This should prove a boost to the refineries sector. BULLISH on NGNS, NUNZ, UNPZ and some more obscure names with high upside - KHAB, ORFE, KRKN, UFNC.


Russian Market Comment:


I mentioned yesterday that even though Bernarke’s comments attracted investors to emerging markets from South Korea to Brazil as they boosted confidence that the central bank's rate policy won't derail economic growth globally (higher U.S. rates can lure money away from riskier assets); “it remains to be seen how strong the follow-through will be, Watch order book carefully,” I am not seeing particular glamour anywhere as far as follow-through is concerned. The MSCI EM Latin America Index yesterday fell 2.3 percent led by Brazil's Petroleos Brasileiro SA and Cia. Vale do Rio Doce, after rising on Fed’s comments 5.2 percent the day before, the most in almost four years.

SPX itself did not fare much better also retracing half of the “Bernarke rally”. An unpleasant thing about it is that if equities worldwide slump back to “pre-Bernarke levels” it will be A SERIOUSLY BEARISH SIGN.



Individual Russian Issues:

Mechel - announces that it intends to release its results for the first quarter ending March 31, 2006, today. In conjunction with this release, Mechel will host a conference call, which will be simultaneously broadcast live over the Internet. Alexey Ivanushkin, Chief Operating Officer of Mechel, will host the call, Full-year profit dropped a more-than-expected 72 percent to $381.2 million under U.S. generally accepted accounting standards as steel prices fell and raw materials costs rose, the company said on May 18.

Norilsk Nickel - said it increased its 2006 platinum and palladium production forecasts. Norilsk will produce between 95 and 96 metric tons of palladium this year and between 22 and 23 tons of platinum, the company said in an e-mailed statement today, without giving the previous forecast. Norilsk has benefited from a surge in prices for its products as China's expanding economy helped push metals demand ahead of production. The company, which mines inside the Arctic Circle, produces more than half the world's palladium, a fifth of its nickel and 3 percent of its copper. BULLISH on this stock with 170 target.

Russian Equities - Morning Comment - 24 July 2006.

Russian Market Comment:

The mere fact that this “Bernarke rally” lasted for 24 hours and got completely wiped off tells loads. It was obviously used to exit remaining longs at better prices, squeezing out early shorts. VERY NEGATIVE for equities worldwide.

External liquidity – NEGATIVE. Emerging-market stock funds lost $1.86 billion last week, shrinking for the eighth time in nine weeks. Redemptions in the week ended July 19 wiped out the $1.04 billion the funds garnered on a net basis in the previous week. Funds investing in shares of developing countries around the world accounted for 58 percent of the losses, with $1.02 billion in net redemptions last week, the most in five weeks. Asia excluding Japan stock funds had the biggest net outflow of any emerging market region, with $446 million in withdrawals. Latin American stock funds lost $155 million on a net basis, while those that invest in emerging markets in Europe, the Middle East and Africa had net outflows of $242 million.

Internal liquidity – ALSO DOWN from last week. The balance of correspondent accounts at Russian commercial banks amounted to 369.0 billion rubles (about $13.71bn) as of the beginning of business on July 24.

SELL INTO RALLIES.

Hello - I am just wondering if my updates on Russian equities are actually interesting to anyone on these forums. No probs if they are not - I understand it is a niche - a lucrative one but still just a niche. lemme know, thx

Yes! Your posts are always interesting.

Hi China White, YES, all your posts are very interesting and I do hope you choose to continue. Thank you!

china white said:

Hello - I am just wondering if my updates on Russian equities are actually interesting to anyone on these forums. No probs if they are not - I understand it is a niche - a lucrative one but still just a niche. lemme know, thx

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I am very interested in Russia. specifically Gazprom, Rosneft, etc ... please continue!

Su-27 said:

I am very interested in Russia. specifically Gazprom, Rosneft, etc ... please continue!

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Hello mate, happy new year to you!

I am presently covering EMs (incl. Russia, CECE countries, Israel etc...) along with Portugal, Spain, Greece and Austria in equity derivatives / equity swaps and CDS. Let me know what your e mail is, I will be showing you markets I am working.

Cheers

Sounds interesting.

Who are you using for CDS?

Are you using CFDs for the equities trading?

most of my transactions are OTC, including CDS - especially when u go into Russian or Brasilian or Israeli companies.

Answering your question, I never do CFDs. I can put you in touch with my CFD desk if you want me to though. I am direct market when it comes to listed options, but again most of my trades are OTC.

Am interested in looking into trading iTraxx, iBoxx index CDS but not single names.
However, would need electronic trading via FIX or API and not sure if this is readily available yet.

Currently taking at look around at CFD providers to see what market coverage is available so would be interested if you could provide details. Again would need DMA trading via FIX/API and the ability to trade baskets.

Thanks

As a heads-up - I am seeing the same pattern as in the first week of 2006 - with Russian local market closed for hols, London ADRs are flying. In this situation big boys HAVE to buy ADRs no matter what. So when the local market opens it will probably gap up 8-12% - exactly like last year.

Also, you perhaps know that EDX recently launched listed options exchange on the newly-created FTSE Russia index (RIOB Index on BBG) and its 10 ADR/GDR components. 70% of flow so far is coming from options on Gazprom, another 20% from RIOB Index futs and options.

china white said:

As a heads-up - I am seeing the same pattern as in the first week of 2006 - with Russian local market closed for hols, London ADRs are flying. In this situation big boys HAVE to buy ADRs no matter what. So when the local market opens it will probably gap up 8-12% - exactly like last year.

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Interesting! Know when the Russian markets open? I see Gazprom ADR has been making some gains yesterday and today ... edging towards $50/share now, up from $46 before Christmas. Lucky for those who have shares, like me!

It will be interesting to see the impact of the Sakhalin II affair ... Gazprom is likely to make big gains in the future in Asian markets, and probably in Western USA from that project. Also, steep gas price increases in countries like Georgia and Ukraine -- and recently Belarus -- should affect the price significantly? On the downside, there are many negative articles about Gazprom and Putin's Russia in the Western press. But these negative sentiments are likely politically motivated, and because of fear of the rise of Russia as an economic power. Truth is, Putin's rule has benefited Russia economically in a great way I think.

Su-27 said:

.....Lucky for those who have shares, like me!
.... Truth is, Putin's rule has benefited Russia economically in a great way I think.

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well done mate congrats! Keep close watch on potential acquisition targets that would make SENSE to Gazprom - GAS SM and GALP PL

even luckier who bought Sberbank on the break-out of 2500 bucks on the 6th of December 2006. 36% up with targets easily round 4300 bucks.

good gains in VolgaTelecom (NNSI RU), UralsvyazInform (URSI RU) and Vismo Avisma (VSMO RU). Very bullish on regional telecoms here.

On Putin - I do not want to start a political debate here, but the QUICKEST economic benefit to a single country in the 20th century was done by Hitler between 1933 and 1937.....