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The outflow of a half of non-residents’ funds under present conditions, when the exchange rate amounts to 6.1 to 6.2 rubles to the dollar, will bring the Central Bank of Russia’s foreign currency reserves to nought and reduce Russia’s gold and foreign currency reserves to $5-6 billion. To preserve Russia’s gold and foreign currency reserves under present conditions, the Bank of Russia will have to allow the exchange rate to grow to 7.5-8 rubles to the dollar by the end of the year (It should be remembered that the Central Bank’s upper limit on the dollar rate is now 7.15 rubles to the dollar).

Yields on government securities grew on the inflow of non-residents’ funds into the GKO/OFZ market at the beginning of March. In the first two weeks of the month, the average weighted yield on GKOs at maturity decreased from 30 to 24.5% per year. However, the mood of market participants changed significantly by the middle of the month. After a six-week-long growth of securities prices, investors began profit taking and the average weighted yields on GKOs began to grow. A new turn in Russia’s political instability caused by the dismissal of the Russian government caused additional tension during trading sessions in the second half of March. In late March, yields on GKOs amounted on average to 27% per year and showed a week upward trend.

It was announced at the beginning of April that the Ministry of Finance would continue to pursue a tough policy on the domestic debt market in the second quarter of 1998. This meant that government securities would be issued only in the amount needed to refinance previous borrowings. If no external factors, such as inflow or outflow of non-residents’ funds and rising expectations of faster devaluation of the ruble, affect the GKO/OFZ market in the near future, yields on GKOs will probably remain at the existing level of 27% per year for a long time. It is evident that such yields will be acceptable to both Russian and foreign market participants under conditions of low inflation and a forecasted 7- to 11-percent growth of the exchange rate.

A strong upward trend that caused premiums on municipal bonds to decrease as compared to GKOs and OFZs was visible on the municipal bond market in the first ten days of March. Later on, it was replaced by a significant growth of yields. As a result, the March performance indicators were practically similar to the February indicators. The average weighted yield on St. Petersburg bonds at maturity amounted to 33% per year at the end of the month, while yields on Orenburg bonds were 39% per year and yields on Moscow bonds, 30% per year, were close to yields on government securities. At the same time, yields on GKOs decreased slightly in March, causing premiums on municipal bonds to increase, as compared to premiums on GKOs and OFZs. These premiums amounted to 5 points for GGKOs, 12 points for OGKOs and about 2 points for OVMZs.

Development of a municipal bond market continued in St. Petersburg in March. The total volume of municipal bond trading exceeded 1 billion rubles (or 80% of securities trading) in March. Moreover, new securities issued by the Republic of Sakha (Yakutia) and the Omsk and Leningrad region accounted for more than 30% of trading volume.

Price levels increased significantly (on average by more than 2 percentage points) on the MinFin market in March. According to Vedi experts, such price movements were explained, in the first place, by foreign investors’ growing interest in MinFin bonds. Regular placement of buy orders accounted for a stable increase in MinFin prices for the greatest part of the period under review. The situation on the MinFin market changed for the worse only at the end of the month, when an upward trend on the MinFin market was replaced by stagnation due to political uncertainty in Russia.

It can be expected that a downward trend will dominate the MinFin market in the first half of April until Russia’s new government is appointed. Market participants will pay much attention to comments on the formation of the new Russian government by IMF representatives. After the appointment of the new government (which may or may not take place in April), MinFin prices will be determined mostly by local factors. MinFin prices are likely to begin to increase closer to the end of the month.

The reduction of oil prices, which began at the end of October 1997, began very rapid in March 1998 due to a number of factors. At the beginning of the spring of 1998, oil prices amounted to only 60% of the last year’s average ($19.3). This caused Russian oil companies’ share prices to decrease by more than 30% on the Russian equity market, while the volume of trading in oil companies’ shares decreased by nearly 50% (to 25-30% of the general market level). Shares in Russia’s largest oil producers and exporters, LUKoil, YUKOS, Tatneft and Surgutneftegaz, were hit the most significantly by the reduction of oil prices.

According to long-term forecasts, oil prices will remain at the existing level ($13-$15 per barrel) irrespective of what OPEC countries agree on. According to the oil industry’s specialists, the abolition of a charge for oil transportation and a 50-percent reduction of the foreign currency component of the export charge will hardly make it possible to support large oil exporters, while the abolition of the excise tax, which accounts for 10% of government revenues, will be scarcely probable. Therefore, the competitive strength of the Russian oil industry will decrease on the international market and further export-oriented development of the oil industry will become problematical.

Further, since domestic oil prices which at present amount to about 380 rubles per ton are significantly lower than the reproduction cost that makes it possible for a Russian company to develop without losses within the framework of the economic system, the maintenance or development of production becomes unprofitable.

Therefore, it will be natural to assume that the replacement of oil by other energy carriers in the industry’s fuel balance will speed this year. A similar trend is likely to evolve on the equity market. Trading in gas and electricity companies’ shares is likely to become more active. The market for shares in Gazprom, Russia’s monopoly gas supplier which has much political and economic importance and draws much attention from the authorities, will develop independently and will hardly have a significant effect on other companies’ shares. On the contrary, the expansion of the central (UESR) and local power suppliers on the equity market is likely to become stronger. By the beginning of the summer, shares in these companies are likely to account for 65-70% of Russia’s equity market.

Stock market activities will be at a low level in the next month. In April, trading volumes will not exceed this year’s monthly average ($1400 million), while share prices will continue to fluctuate. The stock market index will hardly change by more than +/-5-7%.

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