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14.07.2008 - MDM Comment: Russia and CIS debt market


The Central Bank increased its key rates by another 25bp on Friday. This is the fourth move of its kind since the beginning of the year. Central bank first deputy chief Mr. Ulyukaev said that further tightening of monetary policy is possible. He also said that the regulator may start publishing a schedule of its rates-related board meetings – something market participants, including us, have long called for. Our key takeaway from the Friday move is that the CBR is apparently relatively independent in its policymaking. This was confirmed by a Reuters story published on Friday, which cited an unnamed government source. Hence, prime-minister Putin’s recent statements that anti-inflationary measures should not damage economic growth can be largely ignored with regard to forecasting future CBR actions. We believe the monetary regulator will raise rates one or two times before the end of this year, likely in 3Q with a pause in 4Q. Of course, a great deal will depend on inflation data. The rate hikes will likely be accompanied by increases in obligatory reserve requirements for banks, to reduce the risk of carry trade build-ups by speculators.
Pharmacy Chain 36.6 (NR) released gloomy 2007 results. The company reported a net loss of almost USD100 mn, with particularly weak results seen in the retail division in 4Q (net loss of USD69 mn). Factoring in the recent sale of its medical business for USD110 mn, we estimate the company’s net debt to be around USD210-230 mn as of mid-2008. Against that, the company has real estate worth USD60-80 mn and a stake in VeroPharm worth approximately USD200 mn. So, either the company resolves its logistics/IT problems and turns retail business into a profitable one, or the remaining positive net worth is erased. 36.6 RUB bonds 6 have been recently sold back to the market (after a put date) at an effective rate of 18.6%. After having analyzed the 2007 results, we believe that 18.6% may not even be a sufficient compensation for the credit risk, particularly as yields are getting higher across the whole market.
This morning the CBR allowed RUB to appreciate against the bi-currency basket by another 0.2%. This complements its set of anti-inflationary measures.
Eurobonds: Very little secondary market activity with insignificant price moves. Ukraine has cancelled its new issue. Alfa Bank said it may come with a new issue in a month (Source: Bloomberg).
Ruble bonds: Bond prices are drifting lower on the Friday rate hike and still significant new issuance pipeline.

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21.07.2008 13:31