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    Equity Market  
    Forecast
    Equity Market

    Growing tension on the international oil market was the main subject discussed by the world’s commodity produces in March 1998 which had a direct relation to the Russian equity market. 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 (A 10-percent increase in oil production by OPEC countries, an increase in oil exports from Iraq, a warm winter in the northern hemisphere and the Asian financial crisis). At the beginning of the spring of 1998, oil prices amounted to only 60% of the last year’s average ($19.3).
     
    MT and DJIA Indices in 1998, points
      
     
    RTS Index and Yields on GKOs
     
     
    Tension on the raw materials market had a negative effect on the attractiveness of shares in oil companies. For instance, it caused Russian oil companies’ share prices to decrease by more than 30%, 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.
     
    Sales in Russian Trade System in January 1997 - March 1998
     
     
    Investors regarded rapid reduction of the liquidity of shares in Russia’s major oil companies as the most significant characteristic of the situation on the Russian equity market. Indeed, unfavorable situation on market segments on which Russian oil giants’ shares circulate could have a negative effect on the equity market as a whole. That’s why other political and economic developments in Russia, including the State Duma’s approval of the Russian budget in the final reading, the dismissal of the Russian government, Moody’s Standard & Poor’s and Fitch IBCA’s decisions in respect of Russia’s credit ratings, health of the Russian President and others, had an insignificant effect on the Russian equity market.
     
    Changes in Domestic Oil Prices and the Industry’s MT index
     
           
    The oil factor had a most significant effect on the market in the second half of the month due to the approach of the OPEC meeting scheduled for March 30. This circumstance helped improve the mood of equity market participants who began massive speculations for a rise. As a result, prices for oil companies’ shares increased by 11% in the period between March 21 and March 28, while the volume of transactions with oil companies’ shares grew 1.5 times. The turnover on the corresponding market segment increased to its usual level, having exceeded a half of the general market indicator.
     
    Company’s Average Domestic Oil Prices, thnd. rbl. per ton
     
     
    However, despite expectations, a meeting in Vienna on March 30 failed to make an important decision on the reduction of oil delivery quotas. As a result, at the end of March oil companies’ share prices were still lower than the start-of-the-year prices (-25%), while trading volumes decreased to 30-35% of the general figure. Therefore, shares in electricity companies (60% of the general market indicator) occupied the vacant market niche.
     
    Industrial Output in Comparable Prices as % to the Previous Year
     
     
     
    Despite unfavorable context that was created by the end of March, the equity market was more active in March than at the beginning of the year. As a result of active speculative transactions on the energy sector, the total transaction volume on the organized off-exchange market grew 1.5 times in March, compared to the previous similar period, and amounted to $1,840 million, a record amount during the last five months.
     
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    Forecast
     
    After growing by 6% in March, the average equity market prices are now at the level they were at a year ago. It will be interesting to point out that the traditional short-term equity market cycle (the shortest changes in market behavior last for 4 to 6 trading sessions) and the similarity of factors that were at work at the beginning of spring 1997 and in March 1998, caused similar movements of the domestic equity market price indicator in March. Similar factors include reshuffles in the Cabinet of Ministers, antagonism between the bodies of state administration and the country’s industrial oligarchy in respect of reforming organizational structure of natural monopolies and the international oil crisis in March 1998.
     
    Results of RTS Trading in EES Rossii 
    Shares in 1998
     
    Results of RTS Trading in LUKoil 
    Shares in 1998
     
     
    When trying to forecast developments on the equity market in the coming weeks we should first point out that an upward trend similar to that that replaced investment depression last year should not be expected this year.

    Indeed, the phase of growth that was observed on the market in late April through March 1997 was prompted by announcements about favorable resolution of a conflict about Russian monopolies, and optimistic information about the livening up of the oil industry caused by high levels of international oil prices.
     

    Results of RTS Trading in Surgutneftegas 
    Shares in 1998
     
    Results of RTS Trading in Tatneft 
    Shares in 1998
     
     
    This year the information background of the equity market is negative. 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.
     
    Results of RTS Trading in YUKOS Shares in 1998
     
      
     
    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.
     
    Results of RTS Trading in Gazprom Shares on the Moscow Stock Exchange in 1998
     
     
    When looking at political developments associated with the formation of the new Russian government, we can point out that the absence of the equity market’s long-term reaction to reshuffles in the Russian bodies of power similar to those that accompanied Russia’s parliamentary and presidential elections in 1995 and 1996 testifies to a significant reduction of political risks of investment in Russian equities. Moreover, it shows that political climate will have no significant effect on the behavior of the equity market. Information to be received from the Russian authorities will be used by market participants only to conduct short-term speculative transactions.

    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%.

     
    Yield of Return on the Most Liquid Shares
     
    Company
    Yield, % per month
    Yield, % annual
    Trading Volumein March, mln. USD
    Share in the Sector, %
    Share Price as of March 31, 1998
    January
    February
    March
    January
    February
    March
    Oil and Gas Production
    Gazprom*
    -32.71
    7.70
    11.67
    -392.57
    92.46
    140.04
    181.103
    24.05
    0.97
    Komineft
    -25.61
    5.45
    0.69
    -307.32
    65.45
    8.28
    0.141
    0.02
    2.92
    LUKoil
    -30.01
    11.98
    -1.68
    -360.17
    143.79
    -20.17
    419.692
    55.74
    17.55
    LUKoil  
    (Preference Stock)
    -36.73
    7.21
    -8.25
    -440.80
    86.54
    -99.01
    16.525
    2.19
    10.23
    Noyabrskneftegas
    -25.74
    7.41
    -5.17
    -308.82
    88.89
    -62.07
    0.028
    0.00
    5.5
    Purneftegas
    -39.23
    37.78
    -12.10
    -470.78
    453.33
    -145.16
    0.486
    0.06
    5.45
    Purneftegas  
    (Preference Stock)
    -42.86
    -28.26
    6.97
    -514.29
    -339.13
    83.64
    0.482
    0.06
    1.765
    Sakhalinmorneftegas 
    -33.75
    -20.00
    5.50
    -405.05
    -240.00
    66.00
    0.392
    0.05
    5.275
    Slavneft-Megionneftegas
    -43.16
    23.33
    2.70
    -517.90
    280.00
    32.43
    3.054
    0.41
    3.8
    Surgutneftegas
    -45.99
    25.55
    9.47
    -551.93
    306.61
    113.68
    59.136
    7.85
    0.156
    Surgutneftegas  
    (Preference Stock)
    -37.84
    10.00
    3.90
    -454.13
    120.00
    46.75
    14.988
    1.99
    0.08
    Tatneft
    -32.50
    11.00
    3.60
    -390.00
    132.00
    43.24
    54.391
    7.22
    115
    Yuganskneftegas
    -38.94
    -14.20
    -17.24
    -467.26
    -170.41
    -206.90
    0.574
    0.08
    6
    YUKOS
    -31.19
    -15.22
    -7.69
    -374.31
    -182.61
    -92.31
    1.603
    0.21
    1.8
    Electrical Power
    EES Rossii
    -27.70
    27.41
    15.52
    -332.43
    328.89
    186.19
    757.092
    73.26
    0.3179
    EES Rossii  
    (Preference Stock)
    -31.21
    13.58
    4.66
    -374.48
    162.91
    55.98
    42.612
    4.12
    0.1795
    Irkutskenergo
    -44.79
    32.31
    12.54
    -537.44
    387.77
    150.50
    59.633
    5.77
    0.1705
    Krasnoyarskenergo
    -36.34
    61.00
    55.28
    -436.10
    732.00
    663.35
    1.293
    0.13
    0.25
    Kubanenergo
    -21.67
    3.86
    76.07
    -260.10
    46.29
    912.79
    3.482
    0.34
    64
    Kuzbasenergo
    -49.15
    7.02
    34.43
    -589.83
    84.21
    413.11
    3.698
    0.36
    0.41
    Lenenergo
    -20.74
    -36.92
    8.54
    -248.87
    -443.08
    102.44
    0.728
    0.07
    0.445
    Mosenergo
    -21.03
    30.89
    -6.21
    -252.30
    370.71
    -74.48
    155.430
    15.04
    1.224
    Saratovenergo
    -32.05
    -10.71
    16.00
    -384.62
    -128.57
    192.00
    1.022
    0.10
    0.029
    Sverdlovskenergo
    -34.24
    -23.11
    17.79
    -410.87
    -277.36
    213.50
    2.038
    0.20
    0.48
    Telecommunications
    MGTS
    -50.37
    19.40
    5.62
    -604.44
    232.84
    67.50
    1.503
    1.63
    845
    NGTS
    -31.51
    -22.54
    18.18
    -378.08
    -270.42
    218.18
    0.169
    0.18
    65
    Rostelecom
    -12.84
    20.21
    -6.27
    -154.10
    242.47
    -75.21
    83.331
    90.24
    3.29
    Rostelecom  
    (Preference Stock)
    -25.32
    12.77
    -1.68
    -303.90
    153.22
    -20.14
    4.036
    4.37
    1.9625
    St. Pb. Telephone
    -21.43
    5.00
    19.05
    -257.14
    60.00
    228.57
    0.222
    0.24
    1.25
    Tyumentelecom
    -26.51
    21.57
    32.26
    -318.07
    258.82
    387.10
    0.875
    0.95
    4.1
    Uraltelecom
    -31.73
    9.09
    8.33
    -380.77
    109.09
    100.00
    0.672
    0.73
    19.5
    Machinery
    GAZ
    -13.61
    27.66
    7.92
    -163.28
    331.91
    95.00
    10.832
    87.62
    129.5
    KAMAZ
    -47.13
    13.68
    34.26
    -565.57
    164.21
    411.11
    0.969
    7.84
    1.45
    Idgorsk Plants
    -25.27
    16.67
    0.00
    -303.26
    200.00
    0.00
    0.562
    4.54
    63
    Metallurgy 
    Norilsk Nickel
    -24.90
    9.47
    15.00
    -298.84
    113.68
    180.00
    16.218
    83.93
    5.98
    Norilsk Nickel  
    (Preference Stock)
    -35.74
    10.75
    12.87
    -428.92
    129.00
    154.40
    3.043
    15.75
    5
    Nizhni Tagil Metallurgical Combine
    -3.89
    -17.78
    8.11
    -46.67
    -213.33
    97.30
    0.062
    0.32
    0.08
    * - Moscow Stock Exchange’s data 
     

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