Updated September 23, 2008

   The rapid quotations growth that took place during the trades in the Russian stocks on Friday, September 19, didn’t have any continuation on Monday, September, 22 - according to the results of the trading session, the indices added 0,6-1%. The trades’ volume has exceeded hardly the Friday indices, when the stock exchanges have been trading within half of the day. The market participants expect the entry of the budgetary facilities to the market, as well as the recovery of the affected companies and banks’ solvency.

   Before the trading session of September, 22 started, the Federal Financial Markets Service (FFMS) had informed the participants that they could finalize the margin lending agreements reached before the trades had stopped on September, 17, and sell their securities. "The lifting of the FFMS’s ban on the margin trade resulted in the burst of activity at the beginning of trades and the quotations surge", the head of Olma IF’s sales department Dmitry Lobanov marked. At MICEX (Moscow Interbank Currency Exchange), 30% of the turnover fell mostly to the first hour of trades.

   On September, 22, the overall trades volume of MICEX (RUR 30,4 billion) had equaled almost the Friday volume (RUR 31 billion), but the brokers were trading during half of the session due to the interruptions, so, the volume fell almost by half. The analogical situation was during the trades in the Russian securities at the LSE (London Stock Exchange). If on Friday, September, 19, the trades’ volume totaled $3,1 billion (the sum of the agreements reached with Gazprom attained $1,2 billion), on Monday, September, 22, the trades’ volume didn’t exceed $1,5 billion.

    The continuing oil prices growth (on September, 22, Brent crude’s quotations exceeded $100 per barrel, and WTI’s quotations reached $108 per barrel) didn’t lead to the active purchases of the investors. According to the results of the day, the MICEX index added only 0,62%, and settled at the mark of 1105,73 points, and the RTS index grew by 1,05%, and settled at 1309,5 points. Europe’s trades closed with the indices’ drop by 1,4-2,3%, and in the USA, the markets opened with the drop of the top indices by 1,6% (19.00 Moscow time).

   Along with such low trades’ volume and the growth of the key Russia’s indices, the speculative trade in some securities caused such quotations’ fluctuations, that the trades in them were suspended. MICEX suspended the trades (due to the rapid quotations’ growth) in the stocks of Volzhskaya TGC, MREGC (Moscow Region Electric Grid Company), Irkutskenergo, Yakutskenergo, TGC-1, OGC-2, and STC (South Telecommunication Company). The volatility that grew lately led to the major discrepancies in the quotations of the same securities traded at MICEX and the LSE. "After on Friday, September, 19, the trades in VTB Bank’s stocks had been closed at the internal market due to the major surge in price, the demand that was pushing the quotations up, moved to the LSE, where the price of the bank’s depositary receipts grew by 40%", the vice president of SI Capital Dmitry Sadovy explains. In order to terminate the difference, on September, 22, VTB’s quotations were moving towards each other, and as a result, they grew by 15% at MICEX, and the bank’s depositary receipts lost 13% at the LSE.

   Such major quotations’ fluctuations attract speculators, but frighten the investors off. Lately, the maximum daily prices’ fluctuations of "the blue chips" exceed rarely 8-10%, the head of Kapital MC’s analytical department Sergey Karykhalin explained. However, the events of the previous week showed that quotations can fluctuate within 10% during a day.

   According to the experts, the majority of the former active trades’ participants, such as Troika Dialog and Renaissance Capital, have cut their activity at the stock exchange for some time. The rumors about a sale or withdrawal from a purchase of one or another investment company or bank go around the market. The senior investment manager of Gazprombank Asset Management Andrey Zokin considers that investors are waiting for the entry of the budgetary facilities to the market. The facilities are very important for the majority of the players to operate at the stock market. "Previous week, we had won the discount back that was being formed due to the liquidity shortage at the market. Now, everyone expects, when the wish comes true", Mr. Zokin marks.

Updated September 23, 2008

   JSC TransContainer’s IPO planned for 2008-end should have become the acid-test ratio of the investors’ interest in the subsidiaries of Russia’s Russian Railways JSC (RZD). However, the dire condition of the stock market has made the company to put off the placement to 2011. The IPO of another RZD’s subsidiary - RefService - is put off as well. The experts are puzzled concerning the duration of the pause, since, in their opinion, the market will recover earlier. So, at the moment, RZD has to look for other ways of facilities attraction.

   On September, 22, RZD CEO Vladimir Yakunin reported that the company had put off the stocks placement of its affiliates - JSC TransContainer and JSC RefService (specializes in transporting freights in insulated rolling stocks) - to 2011. According to him, the decision is a reaction to the situation at Russia and world’s stock market. "We are not targeted at selling these stock holdings for any price, and we are ready to postpone the transactions for the later term", the senior Vice President of RZD Feodor Andreev added. He marked also that the decision on the sale would be taken on the basis of the situation at the Russian and international financial markets.

   In TransContainer marked that they didn’t receive yet any official documents concerning this issue. Deputy CEO of RefService company Oleg Bogomolov reported that he wasn’t aware of the new decision of RZD’s management. "RZD directors’ board has ratified the sale of 25% plus one stock of RefService within the open auction that will take place at 2008-end. All documents are prepared already, and at the moment, we are waiting for Russia’s government authorization to hold this auction. Moreover, according to our data, as soon as we receive it, the auction will be held", Mr. Bogomolov explained. In RZD refused to comment further.

   TransContainer JSC should have become the first RZD’s affiliate to separate. Three stages of placing company’s stocks were announced: the private placement, the IPO on MICEX (Moscow Interbank Currency Exchange) and RTS (Russian Trading System) and the sale of additional issue of stocks and RZD’s stock holding (it should have reached 51% by this moment). The private placement has been held already: at the beginning of this year, about 15% of TransContainer stocks were sold to the EBRD (European Bank for Reconstruction and Development ), Moore Capital Management, LLC, GLG Emerging Markets Fund and Troika Dialog Investments Limited. Thus, Mr. Andreev said earlier that in 2009, TransContainer intended to place 14-19% of stocks at the London Stock Exchange (LSE). At the end of the previous year, the deputy head of the Ministry of Economic Development and Trade (MEDT) Kirill Androsov said that RefService would hold its IPO in 2008.

   The experts were not surprised at Mr. Yakunin’s decision, and specified that there wasn’t any sense to hold IPOs considering the dire market situation, however, the suspension period was too long. So, Mikhail Sayno from BrokerCreditService supposes that the placement could have been postponed to the mid of 2010. According to his opinion, by this term, the market will recover fully. Ivan Zavadsky from Kapital Investment Company agrees that it is the reinsurance date. "RZD will have to find another way of receiving money, and probably, it may be one or several private placements", the expert says. The head of InfraNews agency Aleksey Bezborodov adds that, probably, Mr. Yakunin has outlined the new direction of the company’s policy concerning assets sale. "I think that RZD both has suspended the IPOs and will put off other sales of its subsidiaries. It is hard to sell them under the good market situation to say nothing of the current condition", the expert says.

Updated September 23, 2008

On September, 22, the senior negotiator with the World Trade Organization (WTO), the director for trade talks department of Russia’s Ministry of Economic Development and Trade (MEDT) Maxim Medvedkov and the head of the information bureau on Russia’s entry to the WTO Aleksey Portansky held the press conference devoted to the talks with the WTO. They have underlined that Russia has never lost contacts with the WTO, even after the August threats made by the US administration. Moreover, Mr. Medvedkov reported that his informal meetings with the members of the Working Group that were held in Geneva previous week on Russia’s entry to the WTO had a great success. According to Mr. Medvedkov, the official meeting of the WTO Working Group takes place early in November. The numerous consultations with the experts will be held before. Russia’s Agriculture Minister Aleksey Gordeev is expected to come to Geneva. Though Mr. Medvedkov refused to name the final date of Russia’s entry to the WTO, according to his analysis, this may happen at the beginning of the next year.

However, three barriers should be overcome. It goes about Russia’s trade regulations and about such barriers as the level of the state backing of agriculture, the size of export duties on lumber, the regulations of the state-owned trade enterprises (Gazprom or Aeroflot). Mr. Medvedkov didn’t expose the details of the reached agreements.

Aleksey Gordeev insists on $9 billion per annum as the national backing of the agriculture. The analogical amount is allocated already to the agricultural state program to 2011. The countries of the so-called Kern Group (it lists 20 countries, including Australia, Canada, New Zealand, and the range of Latin-American and Asian countries), where there is either no any subsidies to the agriculture or they are quite low, demand to cut Mr. Gordeev’s requirement to $4 billion (it is the sum that the federal budget allocated in 2003-2006). However, the compromise is being reached already. The Kern Group is ready to agree on Mr. Gordeev’s promise, firstly, not to increase the amount of the state backing, and, secondly, to allocate no more than $4 billion per year to produce Russia’s own products. The rest $5 billion will be directed to the development of the agriculture infrastructure alone.

As for the lumber duties, Mr. Medvedkov said that if Russia entered the WTO, it wouldn’t raise the export duties on it. According to some data, the range of large Finnish lumber companies is ready to invest about $1 billion in Karelia’s lumber mills next year. Thus, the duties didn’t frighten them away. Finally, Russia’s partners are not afraid of Gazprom or Aeroflot’s monopolistic position anymore.

As a result, the Working Group may finish the preparation of the report on the trade procedure in Russia by the year-end. If such fact is taken to account that the partners of Georgia, opposing insistently Russia’s entry to the WTO, have decided not to pay attention to its position, and Ukraine is not intended to start bilateral talks with Russia (otherwise, Moscow will impose restrictive duties on the Ukrainian goods), all talks, both bilateral and multilateral, may be finalized by the year-end. So, Russia’s official entry to the WTO can take place in March, 2009.

Updated September 23, 2008

The deal of Russia’s Severstal JSC on the purchase of the US coal company PBS Coals Corporation for $1,3 billion is in its final stage. It is the fourth asset already purchased by the Russian metallurgical company in the USA this year. In April, the separate Severstal International division was established to manage Severstal’s foreign steel making assets. Its head, Gregory Mason, said that the company had occupied already the 4th place at the steel market of the USA, and it wasn’t interested in China’s assets, but studied deals in Europe, India and the CIS.

- How significant is the contribution of three American assets purchased this year to the overall financial indices of the Group by the IFRS standards (International Financial Reporting Standards) for 1H?

- At the moment, the contribution is small, because the reporting has covered the indices of Sparrows Point and WCI Steel for several months only within which we have owned new assets. Moreover, the deal on Esmark was finalized only on August, 6, therefore, we will calculate its indices from 3Q. Our enterprises in North America were given EBITDA of $228 million, including $128 million from single transactions. For comparison: in 1H 2007, this index totaled $38 million. The results of the North-American affiliate turned out higher than we had planned. If we mention the synergistic effect, we estimate it at about $135 million as per the result of this year, and by 2011 - over $200 million. We speak here about our four enterprises in the USA, except for the fifth - SeverCorr that we have incorporated in one group, Severstal North America (SNA). We operate SNA as the combined company.

- What investments volume do your American assets require?

- The overall amount on SNA’s enterprises can reach nearly $1,4 billion by 2011.

- Did you calculate the total capitalization of SNA?

- No, and we don’t have any intentions, since we assess Severstal as one company and calculate the capitalization of one company. I can say now that, according to the proforma of this year, the American enterprises will produce nearly 9,7 million tons of steel.

- Why don’t you pay any attention to the assets in Asia?

- Why so? We watch carefully this region as well. The Asian market is huge, but the profitability, especially of the assets we have studied, is quite low. Moreover, we have studied the range of enterprises in China and have come to the conclusion that they are not worth of purchasing, since the country’s raw materials are expensive and it has problems with the electric energy. So, we have decided that we have to concentrate on the market, where we are presented already. However, now, we study the market of India and don’t eliminate the probable purchases in this region. There are some interesting M&A projects in Europe as well, and we are studying them. Moreover, we pay much attention to the assets in the CIS countries: if there are some interesting assets, we will be pleased to enter this market. For instance, we would be interested in some Ukrainian assets.

- What were the aims in the USA, when you were purchasing Rouge Steel in 2004? What are they now, when you have already five steel making assets in this region?

- At the very beginning, we intended to establish a strong and flexible company at the American market that will gain high earnings at the growing market and will manage to remain stable at the falling market from the financial viewpoint. Probably, it is a recipe for success in any industry. Now, SNA occupies already the 4th place in America by the production capacities after ArcelorMittal, Nucor and US Steel. The overall price of assets that Severstal purchased this year totaled nearly $2,8 billion, or $380 per one ton of steel. Now, the US aggregate capacities total about 12,5 million tons of steel a year. By 2009, when we will launch the second section of Severstal Columbus, they will grow by 1,5 million tons. Now, we would have occupied the 3rd place with such volume of flat rolled products production.

- Are you intended to hold IPO of the incorporated SNA?

- At the moment, no.

- Why did it take you four years to reach the second deal in the USA after the first one?

- Don’t forget that within this period we purchased Lucchini Group in Europe. We had to settle all issues and problems with the purchased asset, and later, we will study the next objects. The construction of SeverCorr in the USA was started after one and a half year passed from the day of Rouge purchase.

- If you characterize the market of the USA as good, so, why are the majority of your purchased assets unprofitable or close to bankruptcy?

- It is better to mark that the companies that we purchased this year can’t be characterized as bankrupts or unprofitable. Our first purchase made in 2003-2004 was indeed unprofitable, because it had concurred with the bankruptcy of the range of the American enterprises. Then, it was related to the very low market prices for metal products and to the low demand as well. However, after China resumed its activity, the demand, as well as the prices, went up within two quarters. So, at the moment, we have the opposite American market condition.

- To what markets do your productions orient?

- After we had purchased new enterprises in the USA, we extended the range of products that our assets produce. Now, we produce the tinplate, and we have extra volumes in the galvanization. Sparrows Point is specializing in slabs with the gauge of 315-350 mm to make thick plates both for the further production and for the sale. Worren WCI is engaged in the production of high tensile, alloyed and high carbon steel. These products have their separate niche at the market. If earlier we were focused on the motor industry in Detroit, now, we entered already the market of building structures, household appliances, domestic technique, and heavy engineering. Thus, our stake in the motor industry didn’t fall, but we increased our presence at other markets due to the diversification.

- What criteria do you use to select the next structure for the takeover?

- The key criteria for the selection of any company are as follows: whether it satisfies us from the strategic viewpoint, whether it fits into our business in a region by products and assets, whether it has any synergy with our productions. In addition, we assess the price of the purchase to one ton of the produced capacity (EV/ton.). If we take to account this ratio, in 2004 for Rouge we paid about $98 per one ton, and two years later, the world metallurgical companies were sold for $1000-1200. For instance, Turkey’s Erdemir. Even now, we select our purchases with the lower ratio: we paid nearly $225 per ton for Sparrows Point, WCI Steel - nearly $275, Esmark Inc.- about $500. The construction of SeverCorr, one of the most today’s technologically perfect enterprises worldwide, cost nearly $500-550 per one ton. In other words, we assess the benefits from the purchase first of all and the opportunity of value creation later. The value creation implies the potential realization of an enterprise.

- Why did you buy these assets exactly?

- They satisfied our criteria and strategy. For instance, the US Antimonopoly Committee has forced ArcelorMittal to sell Sparrows because of the non-competitiveness in the area of tinplate production. It was sold by means of the tender that E2 Consortium had won with the offer of $1,35 billion for the asset. We didn’t take part then in the tender because the asset was too expensive in our opinion. However, the winner couldn’t close the deal. As per the results of the second tender, we purchased this asset for $810 million. By the way, the following reassessment of this asset made by the public accountants resulted in the extra $219 million to Severstal’s net income according to the results of 1H 2008

The strategy of our purchases is that we buy companies with the potential for the additional value. Therefore, when we make such purchases, we don’t indicate EBITDA in the reporting on the new asset that the market would like to see. Some time is required. However, we are convinced that we make good and important investments.

- How did you manage to settle the issues with the American trade unions?

- You should understand that the United Steel Workers (USW) assists us not because we are nice guys with blue eyes and charming smile. Severstal has approved itself in the USA as a very strong and serious metallurgical company since our first purchase of Rouge Steel in 2004. In fact, we both made investments in this enterprise settled with the trade unions and launched extra projects targeted at the company’s development. Moreover, the following construction of the brand new works of Severstal Columbus in Mississippi has proved that we have serious intentions to settle at the American market.

- Will you continue to follow the strategy at the international agreements you have presented?

- Not necessarily. Everything depends on a situation and assets. Though, I can say that at the moment, I don’t see large companies similar to WCI in the USA that could integrate easily into the synergistic structure that we have there now. Moreover, it doesn’t go about synergistic effect alone, it goes about the opportunity to sell them. I admit that there are some enterprises, but the companies would hardly sell them.

- It means that in the future you will have to focus on the purchase of the related productions in the USA to establish the vertically integrated structure?

- This would be logic. Now, when we have the large stake in the steel making, we have to close ourselves with raw materials. Foremost, we require the coal for our coke-oven blocks, the ore for our blast furnaces, as well as the scrap or alternative materials for our electric furnaces and converter processes. We have announced already the next object of our purchase - PBS Coals Corporation, and we will pay $1,3 billion for it.

- Don’t you afraid that your forecasts in the USA may not realize due to the aggravated geopolitical situation after Georgia-South Ossetia war conflict?

- We are doing business, and we are treated as businessmen. Our future in the USA will be predetermined by the current Severstal’s reputation as the global metallurgical company that has specific aims concerning the long-term growth at the North-American market.

Gregory Mason
Was born in Odessa, Ukraine in 1952. Graduated from the Leningrad Shipbuilding Institute. In 1978 emigrated to the USA. Was the Vice President in Detroit Steel Company, the technical director in Caparo Steel, the director for metallurgical production technology in Davy International and the senior engineer in KRUPP Industries. Since 1997 was heading own consulting company, Metal Strategies. At 2003-end, provided Severstal with consultations in the agreement on the purchase of Rouge Steel. Works in Severstal since 2005. This year, was named CEO of Severstal International division. The deputy CEO for production in Severstal JSC.

Severstal International
One of three Severstal JSC’s divisions. Was established in April, 2008 to manage the holding’s foreign assets. It integrates Italian Lucchini (79,8% belongs to Severstal) and the range of assets in the USA: Severstal Columbus (former SeverCorr) in Mississippi and the incorporated company Severstal North America (SNA) that consists of Severstal Dearborn in Michigan (former Rouge Steel), Severstal Sparrows Point in Maryland (Sparrows Point), Severstal Warren in Ohio (WCI Steel) and Severstal Wheeling in Western Virginia (Esmark Inc.), as well as several joint ventures. The total production capacities of all division’s enterprises attain 12,5 million tons of steel products. SNA alone occupies the 4th place by the volume of the produced steel in the USA among the full integrated works.

Updated September 22, 2008

The financial crisis didn’t frighten the investors, since within two days of the VII International Investment Forum Sochi-2008, Russia’s regions managed to attract €14,4 billion. However, there are no any grounds to think that all problems are settled.

On September, 18, the participants and guests of the VII International Investment Forum Sochi-2008 from 40 counties of the world came to Adler airport. Sochi welcomed the guests of the Forum with rain and thunder.

The major events of the Forum were planned for September, 19. The key event was the speech of the Russian Federation’s Prime Minister Vladimir Putin during the Plenary Meeting, and later the participants discussed it. The meeting was private, therefore it was possible to watch it on the huge TV screens set in the press centre and in the core business event locations.

Two topics were prevailing in the talks of the participants and guests of the Forum - the oncoming Olympics 2014 and the problems of Russia’s financial sector. The deputy governor of the Krasnodar Territory Ivan Peronko said that he got the impression that everyone wanted to invest money in the construction of the Olympic objects.

The roundtable discussion was devoted to the problems at the financial market, and Valery Fadeev, the chief executive of Expert media holding, chaired it. According to his own assessments, the speeches of the participants were frank, since nobody denied the fact that the severe financial crisis had affected Russia already. The managing director of Troika Dialog Company Andrey Sharonov marked that Russia’s authorities underestimated how the crisis was serious. However, Mr. Putin had emphasized one issue within this speech - the own strong financial system should be constructed, Mr. Fadeev underlined. The chief executive of the media holding explained that it had been considered earlier that Russia didn’t require its own financial system, since the foreign financial institutions would provide services due to the import of financial ones. In the light of this, the president of the Association of Regional Banks of Russia Anatoly Aksakov has enumerated the major problems that should be settled to execute the tasks the Prime Minister set. One of them is the issue of the financial resources, since the loans are long-term and the banks’ liabilities are short; the legislative aspect, the establishment of Russia’s mass investor and the problem of attracting the population’s facilities. As for the last issue, the agreement about the amount increase of the insurance compensation on deposits to RUR 700 000 has been reached already to settle it, Mr. Aksakov declared.

All participants of the round table came to the understanding that if Russia’s authorities undertook some measures earlier, the crisis would be averted. It is obvious that the financial sector was the first to suffer. However, it will affect the overall economy very soon, since the liquidity shortage in the real sector will lead to the suspension of projects, and that will result in the reduction of salaries and the increase of unemployment, Mr. Sharonov marked.

According to the results of the Forum, Russia’s regions inked 114 agreements and memorandums with the Russian and foreign investors for the total sum of €14,4 billion. It is better to remind that within the XII St. Petersburg International Economic Forum held in June the total sum of the reached agreements attained $14,6 billion. As the press service of the Krasnodar Territory’s administration reported, the governor Alexander Tkachev settled 35 agreements for the total sum of RUR 165 billion (€4,6 billion), moreover, the third part of the agreements was reached with the foreign companies. The Forum received high assessments. "There is no precedent for this case, when within two days, the regions signed so many investment contracts", the head of Russia’ Regional Development Ministry Dmitry Kozak marked at the press conference. The head of Russia’s Ministry of Economic Development and Trade Elvira Nabiullina underlined that the foreign business assessed positively the prospects of the cooperation with Russia.

Updated September 23, 2008

The world financial crisis resulted in the first sale at Russia’s pooled investment market. The owners of AntantaPioglobal Group that had sustained losses on the equity investments in small issuers sold its asset management business. The former CEO of Aton Investment Company Ivan Tyryshkin is the buyer of Russia’s eldest managing company Pioglobal Asset Management. He intends to establish the new financial holding under Pioglobal brand.

As it came out, the former CEO of Aton Investment Company Ivan Tyryshkin purchased 100% stocks of Russia’s eldest managing company (MC) Pioglobal Asset Management. "The deal on the purchase of the managing company at the owners of AntantaPioglobal Group, Alexander Gaydamak and Evgeny Kogan, is in its final stage and will be closed any day", Mr. Tyryshkin said. The head of AntantaPioglobal Group confirmed this information, but refused to announce the details. The parties don’t disclose the sum of the deal.

The agreement on the sale of Pioglobal Asset Management MC was being concluded within the framework of the assets sale owned by AntantaPioglobal Group of Companies that became one of the first victims of Russia’ financial crisis. According to the source in the Group, the equity investments in the second- and third-tier companies turned into the Group’s losses of "several tens of millions of dollars". It was the core reason, why the French bank group BNP Paribas refused to purchase AntantaPioglobal.

Then, AntantaPioglobal’s core owner, Alexander Gaydamak, decided to sell the Group’s assets in parts. On September, 22, Evgeny Kogan declared that in the nearest future, the Group of Companies would announce about the sale of its investment business as well.

Pioglobal Asset Management MC was founded in 1996. In 2007, it was incorporated in Antanta Capital Group of Companies that was renamed into AntantaPioglobal. According to the data of Dengi journal, as of January, 1, 2008, Pioglobal Asset Management occupied the 38th place in the rating of the largest managing companies. The company manages ten open mutual funds and two venture funds. The volume of the managed assets attains RUR 1,5 billion.

The buyer of Pioglobal Asset Management MC Ivan Tyryshkin reported that he intended to establish the integrated retail brand - Pioglobal. Mr. Tyryshkin declared about the intention to pay attention to his own business projects in July of this year, after he had left the chief executive post in Aton Investment Company. According to him, at the initial stage, the managing company will be amalgamated with the Internet broker, NetTrader.ru (earlier, it has been purchased at AntantaPioglobal owners), under Pioglobal brand. "The basic concept is the establishment of the financial holding", Mr. Tyryshkin explained. According to some information, the bank may join the holding in the future.

The market participants surveyed agree that under today’s conditions, the fair price for the asset management business is at the level of 8-10% from assets under the management, or RUR 130-150 million. However, the deal sum could have been less, because the key asset of the managing company - Pioglobal real estate investment fund with the volume of nearly RUR 3 billion - still belongs to the former owners of the company. According to the data, now, it is being put up for sale as well. "The fair price for Pioglobal Asset Management MC is nearly 6% from assets, or RUR 90 million", Kapital Asset Management MC CEO Evgeny Zaytsev considers.

The market participants name the purchase of the asset management business at the height of the crisis quite timely. "Sooner or later, the crisis ends at the markets, and the assets price will grow", the member of Solid Management directors’ board Vadim Sachkov says. Moreover, the new company’s owner has gotten benefit from the purchase - the well-known brand, he adds. "The company doesn’t have to spend on the promotion of the name, and that will permit to save 30-40% of the marketing budget", Mr. Sachkov considers.

At the same time, Mr. Tyryshkin has to make large investments in the development of his business, the experts warn. "The annual budget of the whole structure may reach about $15 million. The new owner shouldn’t save, if he wants to see serious and real results", Mr. Zaytsev sums up. "In the nearest year, about $20 million will be allocated to establish the financial holding", Ivan Tyryshkin declared.

Updated September 22, 2008

   The foreign investors come back to Russia’s stock market. Within the last week, September, 11-17, the facilities inflow to the investment funds exceeded $76 million. The measures on the stabilization of the situation at the financial market undertaken by the state encouraged this process. However, the market participants consider that the facilities belong to the stock speculators mainly, and they can be funneled out of Russia at any moment.

   According to the data of Emerging Portfolio Fund Research, within September, 11-17, the capital inflow to the funds investing in Russia and the CIS countries reached $76,5 million. This index has exceeded 1,4 times the facilities volume funneled out within the preceding week ($55 million). The three-month period of the continuous facilities funneling out of Russia’s equity market by the nonresidents has finished. "We have observed finally the confident purchases made by the nonresidents", Uralsib Company’s Vice President Ilya Lobanov marks. "The major part of them was fixed, when the trades on the Russian floors had been suspended". According to the head of Metropol Financial Company’s department for operations at the stock market Alexander Zakharov, the foreign hedge funds started to buy within the first week of September, and last week, such purchases had the systematic character. At the same time, according to the calculations of the Bank of Russia’s first deputy chairman Aleksey Ulyukaev, the September index of the overall capital outflow from Russia will equal or will be higher than the August index of $4,6 billion.

   Russia’s private investors took interest in the Russian market as well. In Kapital MC fixed the capital inflow exceeding significantly the level of the previous days. The Company’s chief executive Vadim Soskov marked that "the announcement about the state backing of the market restored the investors’ confidence". The head of UFG Asset Management’s department for pooled investments Igor Ryabov confirms the growing interest in the mutual funds, however, he marks that "it doesn’t go about some kind of excitement concerning the mutual funds".

    The facilities inflow to Russia’s market was taking place on the background of the nonresidents’ withdrawal from other BRIC countries (Brazil, Russia, India, and China). Within the period of September, 11-17, $117 million was funneled out of India, $185 million - out of Brazil, and $175 million - out of China. "Within the overall period of the crisis, the funds funneled much more facilities out of Russia as compared to other regions, and as a result, Russia’s market suffered the most, and therefore it is the most attractive now", Ilya Lobanov explains.

   The return of the investors to the Russian market was taking place on the background of the overall situation worsening. The oil prices drop lower $90 per barrel, Lehman Brothers bankruptcy, the takeovers of Merrill Lynch and Morgan Stanley, as well as weak macroeconomic information coming from the USA have frightened the investors worldwide. The major failures to execute repo agreements because of the liquidity shortage aggravated the problems of Russia’s stock market. Due to the panic sales that took place during the first two days of the previous week, the top Russian indices lost 16-23%.

   "It seems trivial, but, when Russia’s investors were selling their assets in a state of panic, the foreign investors, understanding that Russia had the technical collapse, were buying them", Sputnik MC’ director on investments Vladimir Malkhanov said. "When it came out that Russia’s authorities allocate the facilities to back the liquidity, the foreign buyers became more interested in the market". On Wednesday and Thursday, September, 17 and 18, the volume of trades at the LSE (London Stock Exchange) and the NYSE (New York Stock Exchange) totaled $3-3,5, thus it exceeded the indices of the previous four weeks 1,5-1,7 times. The state-owned securities (VTB Bank, Rosneft, Gazprom) were in high demand. On Thursday, September, 18, when the Russian floors were closed until the Federal Financial Markets Service (FFMS) issued the special report, the depositary receipts of the majority of the Russian companies traded in London grew by 4-23%. On Friday, September 19, the trades at the Russian stock exchanges, as well as the purchases, resumed. The rapid quotations growth has resulted in the double suspension of trades. According to the daily results, the RTS (Russian Trading System) index added 22,4%, and settled at the mark of 1295,91 points. The MICEX (Moscow Interbank Currency Exchange) index grew by 28,7%, and settled at the mark of 1098,95 points. Thus, the repo operations continued until 22.00 Moscow time at the MICEX. The trades volume of the western exchanges exceeded $3,2 billion.

   Despite the measures on the stabilization of the market situation undertaken by Russia’s government, analysts consider that in the nearest month, the investors will continue to funnel their facilities out of Russia. "Despite several days of growth, it is not eliminated that foreign investors will wish to fix the profit", Alexander Zakharov marks. Russia’s private investors "were also buying the shares for the short-term prospect", Mr. Soskov supposes.

   The determining factor for the market is still the world economic situation and the financial system, as well as the situation development at the internal financial market. The advisor to president on the economic issues Arkady Dvorkovich declared already that by the year-end, the budget allocates RUR 250 billion to purchase the stocks. The analogical sum will be invested next year if required. According to Russia’s Finance Minister Aleksey Kudrin, the facilities will be directed to buy back the stocks of VTB Bank, Gazprom and Rosneft. "The government interventions in the stock market will result in the quotations growth in the nearest future", Vladimir Malkhanov considers. "However, in the long-term prospect, they can result in the cut of the foreign investors’ interest in the Russian market, since the control of the state means extra risks for them".

Updated September 22, 2008

   Oleg Deripaska’s first large foreign developer project will become the most scale among the other foreign construction projects of Russia’s market players. As it came out, the businessman and his partners take part in the construction of the resort with yacht berths in southern Montenegro. The area covers 2 million sq.m, and investments attain €8,3 billion. The sum is enormous on the background of the world liquidity crisis.

   The chief executive of TriGranit’s representative office in Russia Sergey Gogolev told that Basic Element’s shareholder (BasEl) Oleg Deripaska and the core owner of the Hungarian company TriGranit Shandor Demjan take part in the project on the construction of the resort area in southern Montenegro (Ulejn seaport, Budva). According to him, there is the third large investor in the project - the Canadian businessman Peter Munk, the founder and head of Barrick Gold Corporation. Mr. Gogolev refused to announce the partners’ stakes, but marked that the total volume of investments in the project equals €8,3 billion.

   In BasEl reminded that since 2006, the holding owned the aluminum works, Kombinat Aluminijuma Podgorica (KAR), and the bauxite mine in Montenegro, but refused to comment the developer project. However, Arpad Sekey, Hungary’s ambassador to Russia (from October, 1, will head TriGranit’s representative office in Russia) and Maxim Temnikov, the member of Mirax Group Corporation directors’ board and owner of the project in Montenegro, aware of Oleg Deripaska’s participation in the Montenegrin project.

   One of the market participants aware of the project explained that the owners of the area in Montenegro, who attracted the pool of investors to develop this scale area, take part in the project also. According to the European mass media, the Rothschild family invests in the project as well.

   The partners intend to construct the yacht infrastructure, hotels, apartment estates and villas, Sergey Gogolev said. However, he didn’t specify the total area of the developed territory. At the moment, the project conception is being designed. The construction is planned to start in 2010, and the implementation of the project will take about ten years to finalize. "This construction will resemble the projects directed to the complex development of Dubai’s area", he explained. According to Knight Frank’s partner Ekaterina Teyn, it goes about the territory that can be compared to the area of Monaco (1,9 sq. km or about 200 ha).

   The Montenegrin project exceeds n-fold by the investments volume other construction projects with the participation of Russia’s developers in the foreign countries. Sergey Polonskiy’s Mirax Group completes the construction of Astra Montenegro recreation complex in Montenegro with the total area of 94 000 sq. m. The company owns some projects in the USA, Switzerland, Vietnam and in London, including the construction of Mirax-Beetham Tower skyscraper coupled with Great Britain’s Beetham Company (investments reach about ₤500 million). As it came out in July, Inteco Company intends to allocate €325 million to construct the resort estate in Monaco with the total area of 2 million sq.m., and it is engaged in the hotel construction in Karlovy Vary (the Czech Republic). This year, Metropol Group will start the construction of the residential and office real estate in Hanoi (Vietnam) with the total area of 1 million sq.m., and the company and its Vietnamese partners will invest $800 million in this project.

   Lately, Montenegro’s market demonstrated high growth rates, Maxim Temnikov from Mirax Group explained the investors’ interest in the country. "One and a half year ago, when we were joining Astra Montenegro project, we expected to get the sales price of €3 200 per 1 sq.m. Now, we sell at €6 000", he says. Within the last couple of years, the prices for real estate in Montenegro doubled, Ekaterina Teyn agrees. "Now, despite the financial crisis, the prices don’t fall there, as well as in the Western Europe, where, for instance, in Great Britain, the prices fell by 10% on average within the year", he supposes. However, the advisor to Leader Managing Company’s chief executive Aleksey Chalenko forecasts that in the light of the continuing financial crisis, the sales of Montenegro’s real estate will recover. "The resort real estate is not a purchase of the main apartment, but of the second or even of the third, and it is not so important", he supposes. "However, in the nearest one or two years, the financial situation will rebound, and the sales will recover. Since the realization of the areas will not start earlier, the investors shouldn’t face any problems".

Updated September 18, 2008

   In August, the price growth decelerated and even stopped in the majority of the world countries. However, in Russia, the inflation is escalating - it reached 0,3% within the half of September, according to the calculations of Rosstat (Federal State Statistics Service). Moreover, since the beginning of the year, the inflation attained 10%.

   As for the other countries, on the contrary, the inflationary pressure is falling. Within the August, the prices of the USA fell by 0,1%, and the annual index (growth for 12 months) went to 5,4% down. In August, the prices of both Euro area and the overall European Union fell by 0,1%. It is the first price drop within the four months in the Eurozone. In August, the prices in Germany fell by 0,4%, in Greece - by 1,1%, in Slovenia - by 0,7%, in Spain and Poland - by 0,2%. The prices remained unchanged in Ireland and France.

   In China, the prices are falling already within four successive months: in August, the annual index fell to 4,9% (the peak was in February - 8,7%), since it was backed by the severe restriction of consumer spending. Now, the government can increase the prices for the state-funded energy resources. According to the calculations of Morgan Stanley, in 2007, China’s budget allocated $27 billion for this funding.

   The inflation fell due to the prices drop for primary products. Oil fell by 36% as compared to the July maximum of $147,27 per barrel. Six food products, the prices of which monitors the Food and Agriculture Organization of the United Nations, fell by 8,2% since June. The grain fell by 13,6%, dairy products - by 12%. In December, the futures on wheat will be traded at the level of $7,3 per one bushel, and in February it attained $13,5. In Australia, the harvest of wheat exceeds the level of the last two years combined, and in China and India - higher than the last year’s.

Nevertheless, on Philippines, the inflation attained 12,5% in August (the record for 16 years). Moreover, the inflation grows both in Chile and in Sri Lanka.

   As for Russia, the core reason of prices growth is the increase of the budget’s expenditures by 40%, Troika Dialog’s senior economist Evgeny Gavrilenkov says. "The countries, where the inflation is 2-5% per year, don’t have such growth", he announces.

   However, Russia has crossed already the inflationary peak, Mr. Gavrilenkov supposes. The peak fell to June-July, and by the year-end, the inflation attains 14%. The measures on the backing of the financial markets announced on September, 17 will compensate the capital outflow, and will not result in the considerable inflation growth, he says. The core reason of the inflation growth worldwide is the soft monetary policy of the USA and China, the economists of the Petersen Institute for International Economics Adam Posen and Arvin Subramanian state. Mr. Gavrilenkov agrees that the USA have influenced indirectly on the growth of Russia’s inflation, since the dollar weakening and the oil prices growth have led to the growth of the currency revenue, the budgetary funding and, as a result, to the inflation growth.

Updated September 22, 2008

   The large international institute has assessed the urgent measures undertaken by Russia’s authorities to back the country’s financial system. Standard & Poor’s Rating Agency has downgraded the forecast of Russia’s credit ratings because of "the escalating uncertainty concerning the economic policy" on the fight against the liquidity crisis.

   At the end of the previous week, the international rating agency, Standard & Poor’s (S&P), revised the forecast on Russia’s sovereign credit rating from "positive" to "stable". "The forecast revision is predetermined by the escalating uncertainty concerning the economic policy related to the fight against the liquidity crisis at Russia’s financial markets", S&P’s credit analyst Franklin Gill marked. The long-term credit ratings remained unchanged - under obligations in foreign currency, BBB+, under obligations in national currency, A-, as well as short-term sovereign credit ratings, A-2. Moreover, the credit rating under national scale was approved (ruAAA).

   "The timely decision of Russia’s government to allocate the budgetary facilities to the banking system can encourage the maintenance of trust to it, nevertheless, the situation may require significant capital inflow", the Agency’s experts explain the rating lowering. So, the Agency expects that within the nearest 12 months, "Russia’s budgetary and international reserves will be cut".

   In the present situation, the Agency emphasizes such negative factor as the significant growth of the capital outflow from Russia in September "that has resulted partly from the Russian authorities’ twin policy concerning the stockholders’ rights". "The closing of the foreign sources on the facilities attraction can finally influence on the real economy", in S&P commented the situation. "The reduction of the lending growth may lead to the reduction of the private sector’s revenues, and it is unclear, whether the companies will manage to settle their debt obligations. So, the budget deficit may take place already in 2009-2010".

   After S&P has revised the forecast on the country credit rating, it has downgraded also the forecast on the ratings of the Moscow city, the Bank for Development and Foreign Economic Affairs and the Russian Development Bank from "stable" to "positive" as well.

   Fitch Rating Agency doesn’t intend to revise the forecast on Russia’s sovereign rating that is stable at the moment. However, Fitch assesses some Russian borrowers somewhat in the other way. On Friday, September, 19, Fitch Ratings started to revise the rating of the construction company, PIK Group, towards the probable lowering. Before Fitch began to revise PIK Group’s assessments, its experts emphasized also the escalation of risks due to "the range of some negative shocks and growing pressure in Russia’s banking sector". The analysts of Moody’s Agency are more optimistic. "Despite the collapse of the local stock markets and the considerable capital outflow that took place within the last couple of weeks, the governmental currency assets are still very large and can face the serious cost of financial intervention", Moody’s senior analysts on Russia and the CIS Jonathan Shiffer marks in the Agency’s report.

   Russia’s experts consider that S&P’s decision is facile and "too peremptory". "The apocalyptic scenario of S&P’ analysts has to be applied to the American reality instead of the Russian one", the analyst of Renaissance Capital Nikolay Podguzov considers. "Russia’s financial system has better positions now to face the consequences of the world financial crisis". The key factor in the country rating is a state’s ability to settle its debts, and at the moment, there is the budget deficit in Russia and its debt to GDP totals less than 5%, Mr. Podguzov marks. In the opinion of Alfa Bank’s economist Natalia Orlova, S&P responded to the reduction of the state’s opportunities on the long-term investments. "The major state holdings turn into the deposits in the banking system", she says. "However, it doesn’t mean that Russia can’t fulfill the obligations on its external loans".

   However, some experts don’t eliminate the probability of the further assessments revision for Russia. "Today’s measures directed to the stabilization of Russia’s currency market will result in the reduction of the country’s gold and foreign currency reserves", the analyst of AntantaPioglobal Investment Company Maxim Osadchiy says. "In addition, the capital inflow to the stock market will aggravate this process". Earlier, the high level of gold and currency reserves mostly has been the key reason of high assessments of the international ratings agencies, and it means that their lowering may result in the revision of the country ratings.