Updated January 24, 2008

   2007 became the worst in the XXI century for the world financiers on the whole.

But it turned out neutral for Russia in particular. The final profitability of almost all types of investments has exceeded the inflation despite the rather difficult external macroeconomic situation, the unstable raw material markets and increased inflation.

However, the risk was rather high, even extremely high. But, let's follow the order.

Inflation

   According to 2007 results the Russian inflation totaled 11,9% (the official Rosstat (Federal Statistics Service) data). The final inflation has significantly exceeded the planned 8% even at the most "correct" calculation. It was absolutely unreal to restrain inflation within the 8% limits in terms of political task importance in the pre-election year.

   In the first 2007 half-year (at the relatively low oil price) the inflation has been managed to restrain within the 5,7% limits, that is 0,5% lower as compared to the same period of 2006, having applied the method of inflation control by strengthening the ruble well-reputed in 2006. We will remind that in 2006 first for 15 years Russia fulfilled the plan on inflation – the inflation did not exceed the planned 9%. It has been succeeded to obtain this mainly due to the ruble strengthening – 3% ruble's strengthening other things being equal has resulted in around 1% inflation decrease.

   Last year Oleg Deripaska has named the Central Bank (CB) policy of ruble strengthening the unsuccessful experiment, which impedes the development of the industry (oriented to the export). And Vladimir Putin expressed the dissatisfaction with the excessive ruble strengthening after the businessman. In August CB had promised not to strengthen the ruble anymore, and that called into question the inflation plan fulfillment as such. The situation has been complicated more after the cost growth of oil, metals and food products (cereals, milk, meat). The only maximum the government managed to obtain in such difficult circumstances was to freeze prices for specific food products by February, 2008 without having taken the other active measures, despite the constant grumbles at conspiracy :)

   The final 50% exceed of inflation forecast knocked out the last argument of supporters of "money quantity sterilization" in the Stabilization Fund; in fact, one still can not restrain the inflation, therefore it is already time to start doing something, but not going down the stream.

   Concerning 2008, according to year results CB of Russia forecasts the price growth at 9-10%. We will remind that it has been said in the first three-year budget for 2008-2010 that the inflation should total around 7% in 2008. This forecast has been corrected for a long time. However, at the end of 2007 the Ministry of Economic Development and Trade has consented to raise the level up to 8%.

Currency

   According to the year results the dollar has fallen 6,8% down. One should not expect the tendency to change in 2008, as in addition to the problems of the USA economy, the tendency of the currency reserves' rebalancing renders the additional pressure on

the dollar.

So, it is obvious that in 2008 the dollar would go downward easier, than upwards, though the dollar slump was not expected in 2008.

In particular, the minister of finance Alexey Kudrin reported that in 2008

the exchange-value ruble against the dollar would insignificantly strengthen. The majority of experts mark that 2008 would be the last year, when the authorities would resort to the artificial ruble strengthening. Concerning the forecasts of specialists, the predictions can be divided into three groups. The pessimists predict the dollar fall by RUR 23,5. The weighed forecasts are at the current level at RUR 24 per dollar.

There are also those who believe in the future dollar and do not eliminate the growth up to RUR 25-27.

In 2008 the European currency has strengthened by +3,6% against the ruble, the Swiss franc – by +0,9%, the English sterling has a -5,3% fall, the Japanese yen – a -1,4% fall.

Deposits

   Unlike 2007 the majority of the ruble bank deposits did not protect the investments from inflation. Deposit rates has been falling within the first 2007 half after the decrease of refinancing rate of Bank of Russia.

Currently, the 100% state-owned Russian Agricultural Bank offers one of the most attractive ruble holdings – up to 11,5% per annum (at the beginning of 2007 it was possible to open a holding under 12% per annum). In the second half of the year, some banks started to increase the interest rates in terms of the world liquidity crisis. This tendency will obviously continue in the first 2008 half.

Moreover, the increase of refinancing rate of Bank of Russia is not eliminated also, as by the declaration the rate of refinancing should differ from the inflation at approximately 1-2% up. We will remind also that part of the percent on the bank holdings exceeding the refinancing rate was imposed by the 35% tax for the tax residents of the Russian Federation (a bank calculates and withholds the tax at interest payment to the depositor).

The annual euro holdings at the rate of 8% per annum in ruble equivalent brought the 11,8% profit. And the dollar deposits were not the best investment idea in 2007 – at the rate of 9% per annum they brought only the 1,6% profit.

Precious metals

In 2007 the precious metals brought

the rather high return. The dollar prices of gold grew by 31% for a year (22% in rubles, having exceeded the profitability of the Russian stock exchanges indices RTS and MICEX first since 2001), platinum – by 34% (25% in rubles), silver – by 14,8% (7% in rubles), palladium – by 10,8% (3% in rubles).

   One of the most convenient ways of investing into the precious metals is the unallocated bullion accounts (UBA). Several large banks, such as the Savings Bank, Bank of Moscow, Bank ZENIT, Rosbank, Gazprombank, Uralsib, SOYUZ Bank, Project Financing Bank, NOMOS-Bank, Lanta-Bank render this service. Gold purchase on quotations of the Moscow Savings Bank with enter to the unallocated bullion account at the beginning of 2007 attended by the sale at the beginning of 2008 brought (without the tax) a 28,7% profit per annum, silver – 11,6%, platinum – 21,4%, and in case of palladium – 5% drop.

   There are two types of unallocated bullion accounts – on-demand (permanent) and deposit. The interests are not allowed on an on-demand deposit, but it can be closed at any favorable moment and one can leave the market with a return. The majority of UBA falls to the deposits. The account owner pays the income tax (13%) both by the income from the cost growth of the purch ased met

al and by the percent on a deposit. It is curious that UBA interests are allowed in the grams of the precious metal with the open account.

Another convenient way to invest into precious metals is the specialized bank-managed mutual fund.

   Concerning the small bars purchase attended by the sale at the year's end, these investments turned into losses without the type of metal dependence.

One should remember that gold bars, gold units and gold coins are considered a commodity in Russia, i.e. they are imposed by the value added tax (VAT) within the purchase, which is 18% now. This tax is not returned at the repurchase; therefore the 18% is simply a loss for an investor. Another type of investing – purchase of investment coins – does not have such disadvantage.

According to the year results, the ruble profit from investments into gold investment coins ("George the Victorious", "Sower") totaled 7,2%. One should pay the 13% income tax at the sale of investment coin, if you have owned it less than three years.

   Despite the attraction of investments into precious metals one should remember that the percent of the speculative demand component grows each year, although gold is a "quiet harbor" during high inflation and instability.

According to the 3Q 2007 data of the major organization World Gold Council, the world demand for the gold in tones grew 19% up for a year, in dollar equivalent – by 30%, having attained its historical maximum at $20,7 billion. Thus, if in the first 2007 half the consumers of jewelry and retail investors demonstrated the main demand for the yellow metal, since the third quarter the gold funds ETF (Exchange Traded Funds) set the pace at the market. The amount of gold attracted by them and their analogues atta ined the historical maximum at 138 tons in the third quarter.

In the aggregate demand for gold its stake as an investments object increased from 10% up to 19% for the last five years.

Real estate

   According to the 2007 results, first in this century the change of the average ruble denominated cost of a square meter of the residential real estate in Moscow was negative and totaled -2,6%. But the rent price of the office areas in Moscow grew almost 42% up for 2007. Some price growth for residential real estate in the near Moscow area was also observed.

Concerning the market of the residential real estate in the regional centers, the highest price growth among the multi-million cities demonstrated Krasnoyarsk (67%), Volgograd (37%), Perm (35%) and some other.

Stock market

Growth of stock market RTS (Russian Trading System) and MICEX (Moscow Interbank Currency Exchange) indices by 2007 results:

• RTS: 2290.51/1921.92=19.18% in US dollars (11.1% in RUR) 26,3311/24,5462
• RTS-2: 2629.56/1838.14=43.06% in US dollars (33.36% in RUR)
• MMVB: 1888.86/1693.47=11.54% in RUR (19.65% in US dollars)

   The final profitability of the Russian indices looks rather good among the indices of other national stock market indices.

   Growth of industry stock market indices* by 2007 results:

• RTS-Metals and Extraction: 360.19/218.3=65.0% (53.81% in RUR)
• RTS-Oil and Gas: 286.94/260.23=10.26% (2.79% in RUR)
• RTS-Consumer commodities and retail business: 369.5/278.16=32.84% (23.83% in RUR)

• RTS-Industry: 407.05/239.54=69.93% (58..41% in RUR)
• RTS-Telecommunications: 324.35/238.98=35.72% (26.52% in RUR)

*Statistics on the indices that have been started within/in the middle of 2007 (RTS-Power industry, RTS-Finances, the branch and capitalization MICEX indices) is not given.

   As you can see by the profitability statistics of the branch indices, the main disappointment of 2007 was the companies' securities of the oil and gas area, although they had been the traditional growth locomotive of the Russian stocks market within several preceding years.

   Concerning the stocks of the leaders, among the stocks of the second echelon one should select the stocks of KAMAZ (+149,6%), AvtoVAZ (+133,5%), Severstal-Avto (+74,2%), MTS (+66,3%), Aeroflot (+61,6%); and among the "blue chips" – Norilsk Nickel (+57,6%), Rostelecom (+47%). The "main looser of 2007" among the "blue chips" is the stocks of Surgutneftegaz (preferred stocks lost -45,8%, common stocks – -25,3%).

Pooled investments

In 2007 the mutual funds demonstrated rather weak results. Within the year the profitability of the overwhelming majority of the mutual funds has been falling behind the profitability of investments into a stock market index.

According to 2007 results the average profitability of open mutual funds was 8,65%, blend (hybrid) funds – 6,73%. According to the year results, the open bond funds added 6,86% on the average. The interval funds showed better results.

The profitability of the equity funds was 14,9% on the average, and the blend investments – 8,23%. Thus, only 37 from 352 interval and open funds, present in the Investfunds ranking, demonstrated the losses. InvestCapital-Neftegazenergo mutual fund (Investment Capital managing company) showed the worst result – the unit cost went 13,75% down. One of the largest open funds Lukoil Fund First managed by Uralsib managing company (-0,83%) finished the year with losses also. The overwhelming majority of funds investing in oil and financial sectors are among the outsiders list.

Despite the pooled funds, some bank-managed mutual funds, both open and interval, have finally managed to attain higher profitability in 2007.

Detailed information about the leaders of the pooled funds read in the Appendix (see below).

 

Appendix (pooled investments)

Table 1

Most profitable open equity funds

Fund	Unit value increment, %
Alfa Capital – Stocks	21,11
BINBank – Equity Fund	19,75
Region – Equity Fund	19,14
Otkritie – Stocks	18,75
Aton – Equity Fund	14,94
Petr Stolypin	14,81
Capital Growth – Equity Fund	13,28
Arsagera – Equity Fund	12,98
Manegnaya Ploshchad – Russian Stocks	11,49
Alemar – Stocks	10,41

Table 2

Most profitable open bond funds

Fund	Unit value increment, %
MDM -World of Bonds	14,37
Sibiryak – Bond Fund	10,66
Pioglobal – Bond Fund	10,51
Maxwell – Bond Fund	10,35
Renaissance – Bonds	10,19
Lukoil – Conservative Fund	10,14
High-risked Junk Bonds	10,10
Region – Bond Fund	9,32
Univer Fund of Insurance and Pension Reserves	9,15
Rus-Capital-Rantier	8,87
Pallada – Bonds	8,85

Table 3

Most profitable open blend funds

Fund	Unit value increment, %
Garnet	15,76
Lomonosov	15,46
Alfa Capital – Balanced Fund	15,26
Aton – Savings Fund	13,27
Central	12,23
BINBank – Balanced Fund	12,09
OFG Invest – Balanced	11,14
Neophitus – Miscellaneous	10,41
BCS – Optimal	10,35
Allianz ROSNO – Balanced	9,69

Table 4

Most profitable interval funds

Fund	Unit value increment, %
Alfa Capital Equity Growth	65,75
Allianz ROSNO 2-tier stock	38,76
Inerfin Energy	33,38
KIT Fortis – Equity Metals & Machinery Russia	33,34
My fund. 2-tier stocks	24,88
Oplot	16,52
Diamond	14,40
Agora – Russian IPO	14,31
Arsagera – Equities 6.4	13,14
Troika Dialog – Potential	12,28
Source: Investfunds.ru, Expert.ru

Table 5

Most profitable industry funds

Fund	Unit value increment, %
Alfa Capital Metals & Mining	53,41
Trubnaya Square – Russian metallurgy sector	34,94
Inerfin INDUSTRY	24,26
Trokia Dialog – Power Energy	24,20
Trokia Dialog – Metallurgy	23,31
Zamoskvorechye – Russian energy sector	17,99
Trokia Dialog – Telecommunications	16,67
Ostankino Russian Communications	15,20
AVK – Telecommunication Fund	14,90
KIT Fortis Equity Telecoms Russia	11,07
Alfa Capital Telecoms	10,86

Table 6

Most profitable ruble bank-managed mutual funds

Bank-managed mutual fund	Bank	Value increment of participation certificate, %
Hedge Fund	Slavansky Credit	23,76
Avrora	TransCreditBank	21,75
Russian Indices Fund	Uniastrum Bank	16,77
Perspective	Lefco-Bank	14,26
Absolute	CentroCredit Bank	12,64
KIT – Asian Equities Fund	KIT Finance Investment Bank	12,53
Sate-owned Enterprises	International Fund Bank	11,83
Centreinvest Second s	Centreinvest Group	10,67
Absolut – Income	Absolut Bank	9,85
Universal (Lefco)	Lefco-Bank	9,48

Table 7

Most profitable monetary bank-managed mutual funds

Bank-managed mutual fund	Value increment of participation certificate, %
Premier – Oil Fund Double	81,19
Uniastrum – Index Fund of Brazilian Stocks	69,97
Uniastrum – Index Fund of Indian Stocks	55,06
Uniastrum – Index Fund of China Stocks	52,87
Premier – Index Fund of Malaysia Stocks	40,53
Uniastrum – Index Fund of Gold	38,27
Uniastrum – Index Fund of RSA Stocks	36,98
Premier – Global Fund of Logistics Stocks	36,80
Premier – Equity Find of Israel	34,64
Premier – Global Fund of Primary Sector Stocks	32,71