Vladimir Kuznetsov, Equity Analyst at UniCredit Securities.

The state is ready to sell stakes in 10 of the largest state-controlled companies and banks in 2011E-2013E, raising at least $30bn and partly covering the budget deficit, Reuters reports, quoting sources at the Finance Ministry. Prime Minister Vladimir Putin reportedly approved the idea in principle at the latest government meeting.

The Finance Ministry proposed selling the following:

■ 27.1% in Transneft (current stake – 78.1%)

■ 9.3% in Sberbank (60.3%)

■ 24.5% in VTB (85.5%)

■ 24.16% in Rosneft (75.16%)

■ 49% in Russian Agricultural Bank (100%)

■ 28.11% in Federal Grid Company (79.11%)

■ 9.38% in RusHydro (60.38%)

■ 25% in Sovcomflot (100%).

The government decided to postpone the sale of stakes in the Agency for Housing and Mortgage Lending (49% of 100% owned) and Russian Railways (25%-1 share of 100%), the latter until the privatization of its subsidiaries, Reuters reports. According to its sources, the privatizations should bring RUB 298bn into the state budget in 2011E, RUB 276bn in 2012E, and RUB 309bn in 2013E. We regard these numbers as minimum amounts, since the stakes in Sberbank, VTB, and Rosneft alone would be worth about $30bn at current prices.

Our view: The idea of further privatization of state companies is hardly new, but we believe such specific news could prove a catalyst both for the valuation of the companies themselves and for the stock market as a whole. If at current ownership levels dividends from state-owned entities are insufficient to meet fiscal needs, yet the state still wants to retain control, then we believe it makes more sense to sell everything above the controlling level.

We believe that the stock market should take the news positively, as greater liquidity would not hurt any of the stocks mentioned, even market leader Sberbank. At the same time, we think that the process of privatization might – and in some cases, such as Transneft, should – improve corporate governance. We also believe that the Russian equity universe would benefit from the addition of new names, should the state decide in favor of a public offering of Sovcomflot, Russian Railways, Russian Agricultural Bank and/or AHML.

As for the demand and the eventual outcome of the privatizations, much will depend on the terms of each sale, as well as market conditions. In better times, such as 2007, the market had no difficulties digesting $40bn of Russian IPOs/SPOs, and so if market conditions are favorable, the state should have little difficulty placing USD 10bn in each of the next three following years.

Looking ahead to 2011E, we regard the stakes in RusHydro and Sberbank as the most easily “sellable” assets; a Sberbank sale could be facilitated by the launch of long-awaited depositary receipt program and their listing in London. The Sovcomflot IPO has also been preannounced for 2011E.

We also believe that the plan is a positive development for the RUB, as such a sell-off could support stronger capital inflows into the country. The sale of Rosneft and Sberbank stakes was the key factor behind the record $81.7bn in private capital inflow in 2007 and the related strong appreciating pressures on the RUB during the period. We also note that a $30bn boost to the budget could reduce the cumulative deficit over the period by 20%- 25%, which should also ease any rise of domestic interest rates.

Conclusion: We regard the news as positive for the RUB, the market as a whole, and the specific companies mentioned, especially those most sensitive to privatization news, such as Transneft.

By Chris Weafer, chief strategist at UralSib Capital

Asia’s equity markets are trading, on average, 1.0% lower in early afternoon trade after an initial steeper decline was moderated by a small bounce in the US equity Futures and a 1.0% gain for China’s Shanghai Index. That was because of measures announced to boost low income housing. The Nikkei is the worst of the major Asian markets as the yen continues to rally against the dollar (last at 86.695) and puts export competitiveness at risk.

The dominant factor in all global markets is again the concern that the global recovery is stalling. The case for the bears received a boost on Friday with a big drop in a US consumer sentiment survey and worse than expected results from GE and two big Wall Street banks. The bulls have been quick to point out that, albeit less than expected, there is still good underlying growth and that, realistically, recovery was always going to be patchy rather than straight line. Most investors will continue to take the view that, through the mid summer period at least, they are better off on the sidelines and holding onto relatively high cash positions until the trend becomes clearer.

In isolation, the case for Russian equities and the ruble remains positive with growth continuing to build and corporate reports strong enough to support the view that assets are cheap relative to global emerging market peers. But the dominant driver will remain the global environment for some time. That means opening weakness to reflect the 2.9% drop for the S&P, i.e. more than twice the decline when Moscow’s bourses closed on Friday, and a weaker trend for the ruble to follow the weaker trend in Asia’s developing economy currencies today.

The dollar-euro rate last marked at $1.2902 and the price of gold is at $1,192.40 per ounce. Industrial metals are staging a small rally after Friday’s big sell-off with, e.g. copper up 1.0%.

But, that opening weakness will be a mark-down rather than a sell off as the US Futures are indicating a small opening bounce and the price of crude oil is still generally resilient to growth fears. WTI for August last traded above $75.50 p/bbl and Brent is also above $75 p/bbl. So long as oil stays above $70 p/bbl then, while Russia will not bounce in isolation of global trends, it will avoid a sell-off.

The trend towards safer domestic themes was evident in the US market on Friday and also in Russian ADR trade. Mechel closed down 5.9% while Vimpelcom gained 0.2%. That trend may also be more pronounced in Moscow trade while waiting for global market recovery.

The dispute involving Polyus Gold in Kazakhstan is turning increasingly nasty with fresh allegations made by the Assaubayev family that sold 50.1% of KazakhGold to Polyus last year and whom Polyus is suing for $450 mln.

Vedomosti newspaper, citing unidentified officials, claims today that the government will impose a gas extraction tax of 10% to 15% from 2011. The tax reform debate will likely be the most important policy discussion in government over the next year and will give rise to lots of speculation about possible tax changes and about which industries may be targeted. The question of a gas extraction tax has been debated for many years and, so far, has not been supported by cabinet. The bottom line being that Gazprom’s capex programme is so large that it needs the cash flow.

Today is a light day for economic reports with only a housing market index scheduled for the US and some May reports due in Europe. The 2nd Qtr earnings season picks up pace this week with a large number of S&P companies scheduled to report every day this week. As always, a good series of positive numbers will reverse Friday’s nervousness while some more big misses will compound it.

The full end June macro report for Russia will also be published this week, showing the trend in retail sales, unemployment, construction spending, etc. Last week’s industrial production report was less than expected and not strong enough to support the more optimistic GDP growth indicators. It will need to pick up from here. Retail sales growth is expected to pick up to an annualized 5.9%, from 5.1% at end May, and the unemployment rate is forecast to drop from 7.3% to 7.2%.

By Ivan Anderzhanov

The Moscow dollar-denominated stock exchange today marked its 15th anniversary.

We salute you for your unstinting professionalism and service to building Russia’s capital markets to what they are today !

A statement today from the venerable pillar of Russia’s financial system stated:. “Throughout these years the exchange has been developing and growing in line with the national economy to become one of the most important financial institutions in Russia.”

The RTS was established in 1995 as the first regulated stock market in Russia. Key shareholders include global investment banks, like UBS, Credit Suisse, Deutsche Bank, according to the exchange’s website.

In terms of volume of trading, its younger Micex rival has long since outpaced it.

Both exchanges were dubbed as “rinky-dinky” and “mickey mouse” by a senior banker in the wake of daily closures and suspensions following the late 2008 financial crisis.

Many investors who fled both exchanges for the relative safety of trading GDRS in London have returned.

By Ivan Anderzhanov

Has Russian-based investment bank’s campaign to buy brokerages in five of six African countries stalled?

The bank today announced it had has completed its acquisition of BJM Securities, the brokerage business of South Africa’s Barnard Jacobs Mellet (BJM) Group.  The deal was first announced on May 3.

Back in late March, Rencap chief executive Stephen Jennings told the Financial Times the bank was in talks to buy brokerages in five or six African countries. The newspaper said Rencap expected the deals to be completed in the “the next few months.”

Perhaps Rencap’s acquisition push in Africa has run out of steam or maybe they gave brokerage owners’ too much of a heads-up by setting out their shopping list so publicly. One could never accuse Jennings & Co. of lacking hubris but it sometimes leaves them open to some gentle lampooning.

Rencap entered Africa in 2007, and today maintains offices in Nigeria, Kenya, Zambia and Ghana. The firm entered South Africa in February 2010 and appointed Clifford Sacks to lead its South African and pan-African equities businesses. Last year, the investment bank was one of the most active dealmakers on the continent, executing 22 transactions in 13 countries.

By Chris Weafer, Chief Strategist at UralSib Capital

Investors are becoming increasingly concerned that the government is leaning on companies to keep domestic prices low as it tries to keep inflation under its target and to stop the cost of materials from rising.

Tariff growth has been lower than expected, gas price liberalisation is moving slowly, oil product prices are under continuous pressure, material suppliers are under near constant investigation by such agencies as the Federal Anti-Monopolies Agency and PM Putin regularly visits food and medicine retailers to check prices. All very good for sustaining economic recovery but a clear risk to earnings growth and valuation for companies/sectors covering a big segment of the stock market.

Asian equities are trading better today after the US rally extended and because Korea raised interest rates. Malaysia, Taiwan and India have all raised rates in recent weeks and that is being interpreted by investors as a sign that economic growth in the region is strengthening. The MSCI Asia-Pacific Index is up 0.7% in afternoon trade led by a gain of 2.4% for the Shanghai Composite Index.

The price of WTI crude is at $75.81 p/bbl and Brent is at $75.02 p/bbl. Oil remains strong despite a much bigger than expected gain in gasoline inventories in the US last week (+1.3 mln bbl versus an expected 100,000 bbl gain) and helps support the view that oil is well supported above $70 p/bbl. Traders are more encouraged with the IMF global growth upgrade and today’s Korean rate increase as an indicator that demand will remain strong.

Moscow’s bourses and the ruble should again open strongly this morning on the back of the favourable international market and oil price trend. But investor reluctance to add more Russia risk, which pulled prices lower into the close yesterday, may again hold back buyers today and limit the market gains. Follow through in the US market may also be limited today as next week sees the start of the 2nd Qtr/1st Half earnings season and prudence will dictate a cautious approach ahead of several key reports.

An indication of the cautious approach towards Russia recently was the fact that while the US indices and oil closed strongly yesterday, the price of Russian ADRs lagged (and Brazil’s market only managed a 0.3% gain). Mechel was the best of the Russian names albeit only adding less than 1.0%. Normally, with such a market gain, its ADR price gain would be up a multiple of that.

The basic fact is that there is no buying interest as traders and longer-term investors have been burned far too often with quick reversing markets and have decided to sit out the summer. Market makers tried to entice some off the fence by lowering prices but to no avail. The other reason for closing weakness was the news of yet another government probe into the materials sector. This time it concerns coking coal prices and reportedly involves Evraz, Raspadskaya and Severstal. The action again highlights one of the risks for investors in some sectors where pricing maybe controlled, either directly or indirectly, by the state. Unfortunately that encompasses a large portion of the stock market.

The same trend was evident in this week’s fund flow report from EPFR. Although overall flows are modest in keeping with the summer season, it was only the second week since January when Russia funds performed worse than Brazil funds. Turkey funds also attracted more money than Russian. Of course one week is more a blip than a trend reversal but it does show greater caution than we have seen for most of this year. India funds attracted $75 mln of new money last week, Brazil funds reported inflows of $29 mln and China funds took in a net $7 mln. By contrast, Russia funds reported net redemptions of $28 mln while Turkey funds took in $15 mln.

Through the 1st half of the year, however, Russia was the most favoured country destination attracting $2,097 mln. That compares with $1,926 mln invested into China funds, $227 mln into India funds and a net redemption of $1,375 mln from Brazil funds.

By the close of the session, even as WTI was trading at $75.6 p/bbl and the Dow was 0.4% higher, MICEX closed off 0.5% at 1,320.6 and the IOB Index of London traded GDRs ended down 0.3%. Rosneft led the retreat on MICEX, falling 1.5%, with Gazprom off 1.0%. It was also the oil and gas sector that led the decline in London as investors worried that the increasingly tough stance by government over pricing may indicate an equally intransigent stance towards oil taxes and a further delay in gas price liberalisation. Novatek ended the session off 2.6% at $75.0. The steel names were in retreat at the close, albeit only Novolipetsk ended with a loss (-0.9%). Evraz and Severstal closed with modest gains of 0.7% and 0.8% each.

By Ivan Anderzhanov

Russia’s International Industrial Bank suffered the indignity yesterday of becoming the country’s first private bank default on an external debt in over a decade.

Owner Sergey Pugachyov was close to former President Yeltsin’s clan and was once seen to have had reasonably good ties with his successor Vladimir Putin. His latest woes would indicate he has fallen outside the circle of trust, maybe even the garden ring or the MKAD of trust. Tin pot lenders and brokers, with little to middling Kremlin influence, were chucked lifejackets full of cash when the crisis struck in late 2008.

International Industrial Bank, or IIB as it is known, defaulted on a 200 million euro ($250 million) eurobond due in 2010, the bank said late Tuesday.

IIB, ranked among Russia’s top-30 banks, has been the largest recipient of noncollateralized loans from the Central Bank since the credit lines started flowing from the Kremlin at the beginning of the current crisis.

The Central Bank stopped rolling over the debt and began restructuring discussions with IIB in June.

Pugachyov, who is a Duma deputy, has already agreed to sell some of his assets as part of a deal restructuring 32 billion rubles ($1.02 billion) in IIB’s debt to the Central Bank. IIB is the first private bank to default on an external debt issue since Russia’s sovereign default of 1998. Market commentators believe its failure to pay is a one-off and does not  represent a systemic problem for the sector.

By Marcus Williams

Investment bank Troika Dialog has slashed it 2010 target for the RTS index 1,600 from 2,000 due to concerns over Russia’s dependence on oil prices and uncertainty over global economic growth.

The dollar-benchmarked RTS index is trading lower by 1.5 percent at 1333 as of 3pm today in Moscow.

Analysts said Russia would remain tightly correlated to the oil price while concerns about developed markets distracted investors from Russia’s own good underlying marco story.

The brokerage expects the oil price to remain below $70-$80 per barrel until 2011. Crude was trading at $72 today after falling yesterday on concern that a US recovery is not on track.

By Andrei Skvarsky

A Moscow legal group has claimed laywers for ‘murdered’ Hermitage Capital lawyer Sergei Magnitsky have been under persecution from criminal justice officials whom they accused of stealing $230m in budget funds.

In a letter to Prosecutor General Yury Chaika, the Moscow City Bar Association highlighted the actions by Artem Kuznetsov, an employee of the Tax Crimes Department of the Moscow Branch of the Interior Ministry.

Hermitage says Kuznetsov appears to have been “complicit in embezzlement of 5.4 billion rubles [$230 million] of budget funds and, despite this, was chosen to provide operational support into the investigation of the crime.”

The Moscow City Bar highlighted unlawful actions against the lawyers by another official, Investigator Oleg Silchenko of the Investigative Committee of the Interior Ministry. Lawyers described how he “used dirty and illegal methods” to obstruct and intimidate.

Hermitage, which specialises in emerging markets and has an office in Moscow, hit the headlines when its lawyer Sergei Magnitsky, 37, died in a Moscow remand prison in November 2009. Hermitage and human rights activists claimed he was systematically tortured regularly and murdered.

By Vladimir Osakovsky, Head of Macroeconomic Analysis and Research at UniCredit Securities

Topic: The Russian Ministry of Health and Social Development estimates that the state pension fund deficit would rise even more with a higher retirement age, Vedomosti reported.

Our view: According to the report, with the retirement age rising to 65 (vs. the current 60 years for men and 55 for women) the pension system deficit would ease marginally only until 2015, and afterwards would start to rise sharply.

Thus, the ministry estimates that with a higher retirement age, by 2030 the pension system deficit would rise by 85% vs. the current retirement age and by some 8.5X by 2075. First of all, we note that the news highlights the fact that the government has finally started to discuss pension age reform, as was hinted by Deputy Prime Minister and Finance Minster Alexei Kudrin a few weeks ago.

The debate on retirement age reform was effectively initiated by the recent presidential budget address, as we noted in our report, Russian Economics: Efficiency and modernization, published on 30 June 2010. Secondly, we note that such massive deficits in the pension system with a higher retirement age are mostly driven by a much higher outlook for pension increases with a higher retirement age.

Thus, with the retirement age at 65, the ministry estimates that the average pension should be nearly twice as high than under the current system. We note that the proposed retirement age reform faces opposition from all possible directions.

However, we think that even despite this, a rise in retirement age is an inevitable move for Russia, as by 2030 the number of retirees in the country is set to reach the number of working people. Therefore, we expect retirement age reform to proceed, although most likely only after the elections in 2012.

Conclusion: We expect the news to be neutral for the market, as it concerns the distant future

By Ivan Anderzhanov

Barclays Capital, the investment banking subsidiary of the British bank, has kicked off its coverage of Russian stocks.

A London-based team of analysts today initiated coverage on Russia’s leading oil and gas majors.

The team is led by Ilya Balabanovksy, who previously worked at JP Morgan as an oil analyst. Its report today opened up with a positive outlook for the sector with Rosneft named as top pick.

Insiders at Barclays say the group is keen to hire analysts on the ground to cover Russian blue-chips locally.

The bank is a powerful player in debt capital markets in Russia but is yet to make an impact in equity capital markets.

By Ousmène Mandeng, Head of Public Sector Investment Advisory at Ashmore Investment Management

The G20 Toronto declaration seemingly marks the beginning of the end for the macroeconomic policies launched with the Washington summit of Nov 2008, with Toronto focusing on fiscal consolidation rather than preventing economic collapse.

The G20 summit raised parallels with the G5 Plaza accord of Sept 1985 in terms of the need to address issues of potential fiscal imbalances among industrial countries and the need to implement changes to exchange rate policies.

Looking forward, the G20 will have to transition from predominantly G5/7 concerns and move towards a broader focus on issues relevant to the emerging market member countries as well.

Absence of serious debate about exchange issues at G20 most likely attributed to continuous sharp divisions among G20 membership.

Developments that would have allowed having currency issues feature more prominently include the change in the Chinese renminbi exchange rate regime and French president Nicolas Sarkozy’s call for reforming the international monetary system.

France’s intent to put exchange rate issues at the core of its G20 presidency is the clearest sign yet that G20 is looking to become as relevant for the entire G20 than for the G5/7. Mexico’s G20 presidency in 2012 may well mark the coming of age of emerging markets.

By James Beadle from Market-Melange

Russia’s economic situation has improved steadily in 2H10, while it’s equity market has held its ground, and debt has performed well given the increase in sovereign worries globally. Yet, growth and financial market performance have fallen short of expectations, despite sharp disinflation. Looking forward, weaker than expected growth may be exposed to the risk of a global economic or financial shock. Investors preparing for a sharp double dip, continued deflationary pressure or an uncontrolled sovereign default will want to avoid Russia as they avoid other risk assets. But for those expecting a less catastrophic second half, Russia looks increasingly attractive. Accelerating growth and reform momentum are likely to bring strong, if volatile returns over the remainder of the year.

Download the full report here: Russia 2H10