28.10.2008 - MDM Comment: Market Color, CBR, VEB, Rosneft/Transneft, Mosoblast

A better day today for Russian markets. Local equities opened higher after a two-day trading pause. Russia 30 and CDS spreads are looking tighter. It appears to us that in addition to a globally more positive sentiment, emerging markets are being supported by the good news on Ukraine (the IMF facility) and Kazakhstan (USD5 bn bank equity injection plan). The ruble is almost unchanged against the basket (30.39). Our traders estimate that yesterday the Central Bank of Russia (CBR) sold some USD1.3-1.4 bn to support the local currency.

Below are key stories and comments for today:

1. More liquidity support from the CBR. Alexey Ulyukaev, the first deputy chief of the CBR, said yesterday that the regulator may start accepting shares for repo operations with banks. It may also launch six-month unsecured loans to Ba3/BB- and above rated banks (so far three- and one-month money is auctioned; the latter is available to B3/B- and above rated institutions). Of course, both instruments will be very much welcomed by the banks. Repo against shares should help reduce the selling pressure in the local equity market, as some of it is exactly driven by the unavailability of repo.

Additionally, both the CBR and the Ministry of Finance are gradually increasing the rates at which liquidity is offered in an attempt to protect the ruble from speculative attacks.

2. The government may consider the purchase of privileged shares, according to Vedomosti, which referenced Igor Shuvalov, Russia’s first vice-premier. Our analysis is that at this stage it sounds like nothing more than an idea. We do not believe that it will crystallize as a specific action plan soon unless the economic situation becomes particularly dire.

3. VEB has approved the scheme to provide subordinated loans to privately-owned banks. According to the terms and conditions, all B3/B- and above rated banks should be eligible. Shareholders are required to co-invest in a 1:1 proportion (earlier reports suggested that a one ruble loan from VEB would require a two ruble loan from shareholders).

4. Transneft (A2/BBB+) and Rosneft (Baa1/BBB-) may receive a USD20-25 bn loan from China as part of a larger deal, where China secures oil supplies in a 20-year contract (Source: Reuters). If such loans are signed, this would be very good news, signaling that capital for Russian corporates is still available from sources other than the state coffers.

5. Moscow oblast was downgraded 4 notches to ‘B-’ by Standard & Poor’s. Three subsidiaries of the regional administration were lowered to “CC”. All ratings are on the “Negatve” CreditWatch. The Moscow oblast is one of the very few regions in Russian public finance with substantial leverage. The Moscow oblast’s financial policy has apparently been too aggressive during the last two years. The resignation of the Minister of Finance and his key deputy is an indirect confirmation of a certain degree of mismanagement. S&P writes that the administration is having difficulties in refinancing loans with state banks, affecting some RUB100bn of local bonds. In our base case scenario all bonds of the Moscow oblast and its related companies will be repaid on time and in full. The region will likely be supported via loans from the Ministry of Finance or state banks. In exchange the federal government will likely demand tighter control over the regional administration and perhaps even demand a management reshuffle.

28.10.2008 14:38