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April 5, 2008 This is bne's weekly newsletter covering FDI and investment plans in Eastern Europe. You can receive the list as a plain text or html email or as a pdf file. To manage your delivery options: http://businessneweurope.eu/users/subs.php

TOP STORY 1. Police raid on electronics chain Eldorado linked with back tax claims 2. LUKoil plans to refine 1.30mbd of crude oil in 2017 3. Gazprom announces $65bn capex 4. Gazprom raises Nord Stream capex forecast to Euro7.4bn NEWS 5. Browder denies that charged, Interior Ministry confirms 6. Enel said to implement $9bn investment in Russia 7. Russia's involvement in international M&A tops $48.5bn in 2007 8. State-owned land to be freed for housing SECTOR Gas 9. Novatek plans to increase gas output by 11.6% in 2008 10. Gazprom reveals medium-term investment programme 11. Centrenergogaz: The consolidator for Gazprom repairs 12. Gazprom forecasts growth in gas output in Russia 13. Gazprom to achieve annual LNG output at 90 mln tns by 2030 14. March gas production statistics and FY08 production plans SECTOR Oil 15. Weak oil production figures-a call for tax reduction 16. Oil & gas: Monthly data review 17. Rosneft reports reserves update 18. TNK-BP: sale approaching? 19. TNK-BP: 233% organic reserves replacement 20. Victoria Oil & Gas: West Medvezhye licence and drilling update 21. Construction to start 2009 for Burgas-Alexandroupolis pipeline 22. Lukoil buys fuel storage facility from Bulgaria's Petrol 23. Russia to spend $20m on feasibility study on CPC expansion 24. West Siberian Resources provides operational update 25. A Tale of Two Opposites: Integra vs. Eurasia Drilling SECTOR High Tech 26. Russian Technologies to incorporate 33 holdings 27. Rosimushestvo transfers 20% stake in Arzamas Instrumental Plant to Almaz-Antey 28. Jabil might build a plant in Russia SECTOR Metals and Natural Resources 29. Alrosa to go Africa 30. FAS investigating prices for steel used in pipes 31. Magadan Region proposes $500m coal project to South Korean company 32. Oriel Resources acquisition 33. Polyus explores Devil's Trough 34. Rusal to close Norilsk deal by end-April 35. Silvinit plans to pay in full for Polovodovsky licence


SECTOR Power 36. Utilities Sector: Announced retail tariff growth above our expectations 37. Gazprom moves closer to TGK1 control 38. Gazprom sets sights on electricity supply companies 39. Hydro OGK seeks to reduce capex expenditures 40. N Novgorod NPP to cost over $10bn 41. Ukrainian Energoatom signs contract with Westinghouse for nuclear fuel supplies SECTOR Retail, FMCG 42. Heineken to invest 115m euros in Russian breweries in 2008 SECTOR Telecom 43. Comstar gets an LD license in Armenia 44. Comstar launches long-term management incentive programme 45. Effortel Russia to enter LD market 46. MTS bids for SMARTS 47. Sistema's Shyam Telecom obtains Indian CDMA frequencies SECTOR Transport 48. RZhD to electrify an Iranian railroad 49. RZD suggests increasing tariffs for export coal shipments 50. Hymer to build motorhome plant in Russia 51. Ruscon-T to build $19m container terminal in Leningrad Reg SECTOR Agriculture 52. Auchan is to work more with Russian food producers 53. John Deere to put $80 million into project in Russia SECTOR Automotive 54. A Renault u-turn urgently needed as Russia outgrows Avtovaz 55. GAZ Group intends to purchase VM Motori 56. Kamaz looking for strategic imvestor 57. Kalinigrad's Avtotor stops assembling Chery cars 58. Liebherr to build 200m euro engineering plant 59. Moscow to assemble electromobiles in 2009 60. Sibur Russian Tyres: good results, still considering combination with Amtel SECTOR Aviation and defence 61. Aeroflot sells Tupolev 134s 62. United engine corporation could be created in 2008 SECTOR Construction, Real Estate 63. Raven Russia Ltd receives loan from VTB Europe Plc 64. AFI Development: Neutral numbers, positive outlook 65. BRICKS & MORTAR: House hunt for Red October 66. LSR signs contract on cement plant 67. LSR Group finalises acquisition of Betfor Reinforced Concrete Factory in Yekaterinburg SECTOR Engineering 68. Power Machines: FY07 RAS financials and production update 69. Kopeisk Machine Building Plant: New owner and buy-back offer SECTOR Media and IT 70. RBC signs enhanced coverage agreement for RBC TV 71. RBC acquires television station in Novosibirsk 72. CTC Media commences operations in Kazakhstan; 73. Rambler Media spin off GOVT REFORMS, REGULATIONS, ECONOMICS, REGIONS 74. EU sounds optimistic note on partnership talks 75. Vuyugin says Russia's economic growth model unsustainable 76. Kudrin comments on raising energy tariffs in Russia


77. Ministry of Finance submits new oil and gas tax proposals 78. Federal Tariff Service discusses medium-term tariff increases 79. Bills on strategic sectors and telecommunications 80. Putin calls on Shoigu to drop fire checks on small business UKRAINE INVESTMENT 81. 14 Companies Interested in OPP 82. Pricing for the Ukrtelecom sale due 83. Ukraine: More progress on electricity privatisation 84. Crude Steel Output Grew 3.7% in Ukraine in 1Q2008 85. DUPD invests $16.2m in property acquisition 86. Stakhaniv Carriage to double its share capital in July 87. Metinvest Holding to spend over $100 mln on seaports in 2008-10 88. Komsomolets Donbassa to reinvest 2007 NI 89. Kryukovsky Railcar announces 2008-2016 capex programme 90. Kyivstar to roam in Utel's 3G network 91. PIK Group to enter St Petersburg, Ukrainian markets 92. LSR Group: Expanding building materials business into Ukraine 93. Turboatom Ships to France. 94. Ukrainian Energoatom signs contract with Westinghouse for nuclear fuel supplies 95. ZAZ auto plant to renovate facilities KAZAKH INVESTMENT 96. Current account deficit surges to -US$7.2bn in 2007 97. Second well at Zhemchuzhiny to be drilled shortly 98. NC KazMunaiGas considers foreign partnerships 99. Kazakh PM meets Halliburton chairman 100. Tethys Petroleum: New discovery and record high flow rate 101. Caspian Energy reports 2007 results 102. CPC board to meet mid-April to discuss expansion 103. Kazakhmys presented its project on construction of Aktogay GOK 104. Kazakhstan capital needs to construct 7m square metres of housing by 2016 105. Raiffeisen International considers a greenfield in Kazakhstan 106. Real Estate Investment Trust to be created in Kazakhstan 107. Shymkent cement plant to start working again in near future 108. Uranium One weak on the back of poor results and falling uranium price 109. CTC Media commences operations in Kazakhstan; NEUTRAL OTHER COUNTRIES 110. Armenia plans to offer third GSM licence 111. Azerbaijan: Deal on Qazvin-Resht-Astara railway signed 112. Turkmenistan: TNK-BP to provide Turkmenistan with know-how 113. Ingosstrakh acquires Standard Insurance Group 114. Uzbekistan liberalises retail banking sector

TOP STORY 1. Police raid on electronics chain Eldorado linked with back tax claims bne April 3, 2008 Head office of leading electronics retailer Eldorado, which reported revenues of about $6 billion 2007, was raided by Interior Ministry officers after a criminal investigation was opened into $300 million worth of back taxes.


Reports surfaced early March that Eldorado could face back tax claims of up to 15 billion rubles. A criminal case for tax evasion totaling R7bn was opened recently by the investigative arm of the Interior Ministry's Central Federal District branch, said Anzhela Kastuyeva, spokeswoman for the branch, as cited by Moscow Times. Eldorado's main shareholder, Igor Yakovlev, put the tax claims at R8bn and said the company might sell off some of its assets to cover them, Kommersant reported March 5. The tax claims were for 2004-2005, Kommersant reported. The Eldorado case comes after federal tax authorities pledged last month to target the country's booming retail sector, writes Moscow Times,

2. LUKoil plans to refine 1.30mbd of crude oil in 2017 Deutsche Bank April 2, 2008 LUKoil's capex plans exceed our forecasts According to Reuters, LUKoil plans to grow its refining activities from 1.06mbd today to 1.30mbd in 2017. Mikhail Antonov, the company's deputy head of the refining department, has announced that the refining plan of 2.00mbd for 2016 which was presented as part of the long-term strategy document in autumn 2006 was optimistic and is now outdated. We believe that the number incorporated new acquisitions. Our forecast for 2015 is 1.33mbd on the basis of LUKoil's existing refineries only. Antonov also said that LUKoil's investments into Russian refining projects would exceed USD10bn in a decade, but it was not clear if this included previously made investments into ongoing projects. In particular, LUKoil plans to spend: USD2bn to expand the refining capacity of Nizhny Novgorod Refinery from 320kbd to 400kbd (we forecast USD1.8bn from 2006); over USD2bn to upgrade Volgograd Refinery from 200kbd to 240kbd (we forecast USD1.2bn from 2006); USD600m to upgrade Perm refinery from 240kbd to 260kbd (we forecast USD1bn). over USD200m to raise Ukhta Refinery's capacity from 70kbd to 120kbd (we do not incorporate this expansion into our model). We are not making any changes to our model at this stage. Rencap writes: Kommersant reported today (2 Apr) that after several unsuccessful attempts to acquire refineries overseas, LUKOIL has revised its downstream strategy. According to the company's new programme, it will increase refining capacity organically from 58mnt to 65mnt by 2017, while still eyeing possible acquisition targets overseas. LUKOIL's original strategy suggested increasing capacity to 100mnt both organically and via acquisitions.


In our model, we assume a more aggressive scenario of LUKOIL's refining expansion. We will change our assumptions to reflect the new changes, once LUKOIL officially presents its revised strategy through 2017. We expect the company to shed more light on its downstream strategy at a presentation of 2007 results scheduled for 10 Apr.

3. Gazprom announces $65bn capex bne April 2, 2008 Gazprom has said it is switching from acquisitions to investment. In 2009 and 2010, it will invest the record sum of $65bn in the gas business, according to Vedomosti. 2007 was very expensive for Gazprom because it spent almost $10 billion on Sakhalin-2 and Mosenergo alone. All records were broken in borrowings too. The company borrowed 303.6 billion rubles without loans for refinancing in nine months (153 billion rubles in 2006), writes Vedomosti. Gazprom was reducing capital expenditures and forgot about its main business. As a result, gas production in 2007 decreased by 1.3% for the first time in the last five years. Gazprom explained the decrease by warm weather and said that it had enough gas resources. In January, CEO of Gazprom, Alexei Miller, said that gain of the reserves exceeded the production for three years in succession, according to Vedomosti. However, reserves did not grow for the first time since 2003 either. According to the norms of Gazprom, their reproduction had to be at least 100%. By 2008 they amounted to 29.8 trillion cubic meters against 29.9 trillion cubic meters at the end of 2006. In its memorandum for the prepared issue of Eurobonds worth $2 billion Gazprom said that it had gain only in oil resources. The biggest decrease (by 1.5% to 22.46 trillion cubic meters) was registered in Western Siberia where the three main gas fields of Gazprom (Nadym, Urengoi and Yamburg) were located. A few years ago, these fields entered the stage of declining production and putting in new fields to substitute them was delayed. Investments in the fields did not grow. In 2007, Gazprom reduced its investment program twice: by 5% to 156 billion rubles for transportation projects and by 12% to 138 billion rubles for production. Preliminary results disclosed in the memorandum (717 billion rubles) were lower than the latest revision by 62.5 billion rubles. It seems that Gazprom has finally decided to give up. In the memorandum it disclosed investment plans for 2009-2010 for the first time. A manager of Gazprom hopes that they will calm down investors. The memorandum says that financial investments will be reduced dramatically but capital expenditures will be as high as they have never been, that is 850 billion rubles in 2010 or 150% bigger than in 2007. This amount could be enough for acquisition of majority of assets of YUKOS, formerly the largest oil company of the country or for 60% of the five-year investment program of 20 thermal wholesale generating companies and territorial generating companies of RAO UES of Russia.


4. Gazprom raises Nord Stream capex forecast to Euro7.4bn Deutsche Bank April 1, 2008 Gazprom is considering an LNG plant on Yamal Peninsula Gazprom to come up with Central Asian gas formula by 1 July Citing Gazprom's recent Eurobond memorandum, Rosbalt has reported that investment into the Nord Stream pipeline may reach Euro7.4bn (USD11.75bn), up from the original cost estimate of Euro4.0bn. We remind investors that our forecast of USD10.80bn was made before the Euro's rapid appreciation against the dollar. We are making no changes to our Nord Stream capex forecasts as Deutsche Bank expects the dollar to appreciate against the Euro in the medium term. In a separate development, Prime-TASS has reported that according to Head of Gazprom Export Alexander Medvedev, Gazprom is considering an LNG plant on Yamal Peninsula and that it may decide next year whether to build the plant. We believe that initial production at Yamal will only be sufficient to offset production declines in West Siberia, but not enough to supply new markets in LNG. Finally, according to RIA-Novosti, Gazprom plans to come up with a gas price formula for imported Central Asian gas by 1 July. The formula is key for Ukrainian consumers, which are the principal users of the gas from Central Asia. In our Gazprom model we currently assume that Turkmenistan, Uzbekistan and Kazakhstan will sell their gas to Gazprom at European market prices, adjusted for the cost of transportation.

NEWS 5. Browder denies that charged, Interior Ministry confirms bne April 4, 2008 Anzhela Kastuyeva, press secretary of the Russian Interior Ministry's Head Department for the Central Federal District, has clarified her earlier statement that no charges had been filed against Bill Browder, the founder and CEO of the Hermitage Capital investment fund. William Browder, had not been indicted. "What I meant to say is that no indictment was presented by investigators of our department," Kastuyeva said, as cited by Interfax. Interfax meanwhile says its sources have confirmed that Browder was charged with tax evasion on February 27, 2008 by an investigator of the Interior Ministry's Investigative Department in Kalmykia.


However, Browder told bne yesterday April 2, referring to the news of charges broken by business daily Kommersant, that "the Kommersant story is false. There are no charges against me or arrest warrant." Vedomosti today is running an extensive story on how corporate raiders are trying to sue companies belonging to the HSBC bank group and linked with Heritage for $2bn, and that the police investigators leveling tax charges against Browder are in league with the raiders. Vedomosti says a top ranking Kremlin official is also informed of the situation and that the Kremlin has ordered the law enforcement agencies to clarify the situation.

6. Enel said to implement $9bn investment in Russia bne April 3, 2008 Russian presidential aide Sergei Yastrzhembsky has said that Enel CEO Fulvio Conti unveiled plans to invest $9bn in the Russian economy over the next five years. This amount includes 4bn euros that Enel has already spent in Russia and another 2.2bn euros Enel plans to invest in the next five years, writes Interfax. The plans were unveiled to Russian President Vladimir Putin at a meeting April 2. According to Interfax, Yastrzhembsky said Enel will also train electrical engineers. Conti apparently suggested starting training courses for electrical engineers at leading Russian universities and paying bonuses to stimulate interest in electrical engineering. Conti also met with Gazprom CEO Alexei Miller. "The parties considered issues of bilateral cooperation in the oil and gas sphere. In particular, they discussed further prospects for cooperation between the two companies in the realization of joint projects in the gas sphere and in electricity in Italy, Russia and third countries," a joint statement says, according to Interfax. Gazprom Export supplies Enel with wholesale gas as of January 2003. At the same meeting with Italian businessmen, Putin said FDI in Russia had achieved record volumes. "As of January 1, 2008, the volume of accumulated investments reached $220.6 billion, which is 54.3% more as compared to a similar period," Putin said, as cited by Interfax. This includes $103.1 billion of direct investment and $6.7 billion of portfolio, Putin said. "In 2007, $120 billion flowed into Russia as investments, which was nearly 120% more than in the previous year," he added, according to Interfax.


7. Russia's involvement in international M&A tops $48.5bn in 2007 bne March 31, 2008 According to a report published by KPMG, the aggregate worth of M&A international deals with Russia's assets exceeded $48.5bn in 2007, a twofold increase on the figure for 2006, according to Kommersant. The KPMG report says nonresidents closed 126 deals in Russia worth $25.4bn to acquire assets, mostly in power engineering and finance sectors, with E.On and Enel spending over $10bn on WGC-4 and WGC-5 respectively. The KPMG report also highlights the insurance sector, with deals involving Absolut Bank, RESO-Garantia, NASTA and ROSNO insurers in its financial section. Russia's companies bought foreign assets totaling $23.1bn in 2007, with oil and metal companies to the fore. Norilsk Nickel's purchased Canada's LionOre for $5.3bn. Second and third rank companies increased their involvement in M&A international deals, and engineering and chemical industries were also drawn into the process.

8. State-owned land to be freed for housing bne April 3, 2008 President-elect Dmitry Medvedev said April 2 that idle land owned by federal ministries could be released and used for residential development, writes Bloomberg and Vedomosti. He proposed using such a state fund holding such land for construction of low-cost one-family houses. Each "low-cost" house should have between 70 and 120 square meters of living space, Medvedev said at a Kremlin meeting on so-called national projects, according to Bloomberg. Medvedev said there should be more single-family houses and less apartment blocks in the housing mix. "Every family in Russia should have the opportunity to build its own home," he said, according to Bloomberg. "Vast territories are lying idle." Kremlin aide Igor Shuvalov said the fund will accumulate "several million" hectares of land. Regional Development Minister Dmitry Kozak will oversee the project, which may include municipal land "if local authorities support this initiative," Shuvalov said.

SECTOR Gas 9. Novatek plans to increase gas output by 11.6% in 2008 Deutsche Bank April 3, 2008 According to Interfax, Novatek forecasts gas production growth of 11.6%, from 28.5bcm in 2007 to 31.8bcm in 2008. We forecast that Novatek will grow production


in 2008 to 31.1bcm. In our view, this is a positive development since rapid production growth is one of the key drivers behind Novatek's investment case. The planned production growth this year can be achieved on the back of existing capacity which was created last year when production was capped by low demand. From 2009, we expect Novatek's production to accelerate further with the launch of new gas production and condensate stabilisation capacity.

10. Gazprom reveals medium-term investment programme Deutsche Bank March 31, 2008 In a front page article this morning, Vedomosti reports that Gazprom will have to invest more money into its core business while the appetite for acquisitions may subside. This is consistent with our own forecasts, as we believe that in the coming years Gazprom will need to make investments into satellite fields (reflected as part of brownfield upstream capex below), the Yamal peninsula project and infrastructure (including the Nord Stream and South Stream projects). Vedomosti reports that, according to the last Eurobond memorandum, in 2009-10 the company will reduce its financial investments (ie money spent on acquisitions) while in 2010 capex will grow to RUR850bn (USD32.24bn) or 2.5 times more than last year. This compares with our own forecast of USD32.39bn for 2010. We believe that the company's core natural gas segment strategy is strong and management's decisions to invest into gas production and infrastructure are always timely, based on the key principle that gas is not produced until it is sold. For additional details on Gazprom's strategy, please refer to our Gazprom - The One of 24 March 2008.

11. Centrenergogaz: The consolidator for Gazprom repairs Rencap April 4, 2008 . We initiate coverage of Centrenergogaz with a BUY rating, and a 12-month target price of $9,218/common share and $6,453/preferred share (upside potential 92%). Centrenergogaz is the Russian monopoly for the repair and capital maintenance of Gazprom's Unified Gas Supply System (UGSS). The company's distinct position allows its business to grow steadily, in line with expansion of the UGSS and increasing overhaul capex by Gazprom. . Centrenergogaz has assumed a central role in the consolidation of Gazprom's pipeline repair and overhaul assets. The restructuring of Gazprom's repair and maintenance operations has resulted in the consolidation of most repair assets under Centrenergogaz, which has already integrated 19 former divisions of Gazprom's gas transportation subsidiaries. We expect a significant improvement in Centrenergogaz's financials over the next two years, as it takes control of the maintenance business of Tyumentransgaz, Gazprom's key gas transportation company. Our projected five-year CAGRs are 13% for sales, and 30% for net income. . We expect Gazprom's increasing capex to drive organic growth at Centrenergogaz, with the latter benefiting from upgrades to, and the increasing capacity of, the UGSS going forward. We expect Gazprom's capex to increase at a CAGR of about 15% 2006-2010E. The share of capex to be spent on gas transportation (about 46% of


the total) leaves us optimistic about the future for Centrenergogaz's modernisation and overhaul services. With this report, we initiate coverage of Centrenergogaz, the Russian monopoly for repair works and maintenance (overhaul) of Gazprom's UGSS. The company was appointed by Gazprom as the key integrated provider of repair and capital maintenance services for gas compressor stations (GCS) and gas compressor units (GCU). The restructuring of the UGSS repair business, initiated by Gazprom in 2004, has resulted in a significant expansion of Centrenergogaz's business: Gazprom transferred the repair branches of all its gas transportation subsidiaries under the Centrenergogaz umbrella in 2005-2007, resulting in a 53x increase in revenues in 2007 vs 2004. We expect a further significant transformation in 2008- 2009, when the repair business of Gazprom's largest gas transportation subsidiary, Tyumentransgaz (which has more than 3,000 employees), passes gradually under the management of Centrenergogaz. We think another strong value driver for the company will be the expansion of the UGSS over the next few years. We value Centrenergogaz based on an 11.0% estimated WACC. Our 12-month target price is $9,218/common share and $6,453/preferred share. Upside potential is 92% and we rate the company BUY. We estimate a revenue CAGR 2007-2012E of 12.8%, and a net income CAGR of 29.5% over the same period. The revenue forecast is based on assumptions about the transfer of Tyumentransgaz's repair and maintenance subsidiary under Centrenergogaz management in 2008-2010. Key value drivers for the company, in our view, are the following: - The transfer of Tyumentransgaz's repair branch to Centrenergogaz in 2008-2009. Centrenergogaz could significantly increase its revenues with the transfer of a 25% stake in Tyumentransgaz's repair branch under its management in 2008, following which Centrenergogaz will control 75% of Tyumentransgaz's repair branch in 2009. The transfer has been already pre-agreed within Gazprom - the major shareholder for both companies - based on the positive results of asset consolidation under the Centrenergogaz umbrella. - Expansion of the UGSS. This will increase the amount of gas compressor equipment in service, which, in turn, will require additional installation, planned maintenance, emergency repairs and capital maintenance services. This, permanent expansion of Centrenergogaz's market should result in continuously higher revenues. Gazprom's huge planned capex on UGSS expansion will likely drive Centrenergogaz's business. The share of Gazprom's capex on gas transportation is about 46%, and the planned four-year CAGR for total capex is about 15% in 2006-2010, according to Gazprom. - UGSS modernisation. The gas transportation equipment used on the UGSS is currently quite depleted, and requires modernisation. Centrenergogaz, as the leading supplier of repair and capital maintenance services (and a monopoly supplier in a couple of years' time), will benefit from this. - Expansion into other geographies. This is possible due to the optimisation of business processes, increasing production efficiency and Centrenergogaz's huge accumulated cross-industry experience. Management says the company has the


capacity to expand into neighbouring countries such as Kazakhstan, Bulgaria and Belarus. Such expansion would be smooth, in our view, given Gazprom's stable and 4 April 2008 Centrenergogaz Renaissance Capital friendly relations with the governments of these countries, and the similarity of gas transportation equipment used in the different territories. - Gazprom's strategic expansion into the electricity sector could be a further driver for Centrenergogaz's business. The company has extensive experience in gas turbine repairs, and could provide repair and maintenance services for utilities companies controlled by Gazprom, and others. The non-consolidated structure of utilities repair and maintenance make Centrenergogaz's wide experience a very important competitive advantage in this new sector, in our view. - The construction of new gas pipelines stimulated by changes in regulation on associated petroleum gas (APG). The Russian government is to push oil producers to use APG, which some of them will also find profitable to sell. This will require the construction of new gas pipelines to connect APG deposits with Gazprom's main gas pipelines system, which means increased number of GCSs and GCUs and increasing market for Centrenergogaz. - Consolidation of all Gazprom servicing subsidiaries, including Electrogaz and Gazenergoservice, under a single umbrella, could be another positive development for the sector.

12. Gazprom forecasts growth in gas output in Russia Deutsche Bank April 3, 2008 Gazprom forecasts own production at 620-640bcm in 2020... ... and 610-615bcm in 2015, above our forecasts According to Reuters, Gazprom plans to produce 620-640bcm of gas in 2020 (940bcm, together with the independent gas producers). Our gas production forecasts in 2020 are 628bcm for Gazprom and 167bcm for independents, with the balance of c150bcm coming from oil companies' output of associated gas. Simultaneously, Gazprom plans to produce as much as 610-615bcm of gas in 2015, compared with our forecast of 582bcm. We do not expect Gazprom to show growth from current levels, as production from the new fields on the Yamal Peninsula will only be sufficient to offset production declines at the old fields in West Siberia. We do not currently incorporate the East Siberian and Shtokman projects into our Gazprom financial model for 2008-15E.

13. Gazprom to achieve annual LNG output at 90 mln tns by 2030 bne April 1, 2008 Gazprom aims to boost annual output of LNG to 90m tonnes by 2030, Valery Golubev, a deputy CEO of Gazprom, said at a Russian energy forum Tuesday, April 1, according to Prime Tass. This will comprise a quarter of the world's LNG market, with


exports to North America, Europe and countries in the Pacific Ocean region, Golubev said. Alexander Medvedev, another deputy CEO of Gazprom, said Monday March 31 that the company plans to build an LNG plant on the Yamal Peninsula.

14. March gas production statistics and FY08 production plans Rencap April 3, 2008 Event: Reuters reported gas production statistics for Mar 2008 yesterday (2 Apr). Russia's total output reached 60.2bcm, up 1.3% YoY. Gazprom increased its YoY gas production 0.4%, while Novatek was down 1.5%. LUKOIL's production was flat YoY, while Rosneft's was down 17.8%. Action: We retain our BUY rating on Gazprom and our HOLD rating on Novatek. Rationale: Gazprom continues to outperform Novatek in terms of its production growth: up 2.8% YtD (in line with Russia's average of 2.7%), and slightly ahead of its full-year target growth rate of 2.5%, implied by its updated 2008 production guidance of 561bcm, released yesterday by Valery Minlikaev, the company's head of gas production. Novatek's production is up just 0.5% YtD, materially below the company's full-year target of 10% (yesterday Interfax quoted Novatek's targeted gas-production growth even higher at 12%, citing unidentified sources). We associate Gazprom's outperformance with its recent entry into the unregulated segment of the domestic gas market which has created market-based incentives to grow domestic gas sales for the first time in its recent history. Given gas output growth YtD, we believe Novatek's full-year production target starts to look high.

SECTOR Oil 15. Weak oil production figures-a call for tax reduction UBS April 4, 2008 As we expected, reported crude oil production figures for March are weak Today, the Russian Energy Ministry reported operating data for Russian oil companies for March and 1Q08. Oil output decreased by 1.3% y-o-y and 0.3% mo- m and dropped to 9,759 kbpd in March. This implies that the level of crude oil production has decreased to the November 2006 level. While Rosneft, Lukoil and TNK-BP Holding were able to keep production flat m-o-m, Sakhalin 1, Gazprom Neft and Surgutneftegaz jointly lost 28 kbpd. At the same time, the quarterly data look more worrying-Lukoil lost 73 kbpd in 1Q08 in comparison with 1Q07, TNK-BP Holding lost 29 kbpd, Surgutneftegaz lost 67 kbpd, Gazprom Neft lost 35 kbpd and Slavneft 30 kbpd. Rosneft was the only company that showed production growth y-o-y and this was achieved through Yuganskneftegaz results. Weak operating figures provide evidence the tax burden should be lowered The weak production figures, while we expected them, are an unpleasant surprise for the public and the production figures will likely support the government's case to


ease the tax burden on Russian crude producers. The posted operating data are a direct result of the slowdown in drilling volume growth and an acceleration of the natural decline in West Siberia. Gas production figures look healthy The reported gas production figures look healthy. Russian gas output grew to 1,943 mn cm/d in March (up 1.3% y-o-y) and to 1,978 mn cm/d in 1Q08 (up 1.6% y-o-y). Due to the average winter this year, Gazprom was able to increase its production by 1.4% y-o-y in 1Q08.

16. Oil & gas: Monthly data review Rencap March 31, 2008 Today (31 Mar), we publish our report, Oil & gas: Monthly data review. Russian daily crude output in Feb 2008 was up 0.1% MoM (+6k bpd) to 9.749mn bpd. The YoY growth rate stood in negative territory, averaging -0.9% vs -0.7% observed in January. Moreover, the YoY growth rate was materially lower compared with +4.5% seen in Feb 2007. We expect Russia to produce flat to less crude YoY through Apr 2008, with some seasonal recovery thereafter. However, as we expect no growth at all for the core producers this year, our forecast for Russia's overall crude output in 2008 is just 0.5% YoY measured in tonnes, and 0.2% YoY in bpd terms, once adjusted for the leap-year effect. Over Feb 2008, Russian gas output was modestly up 4.8% YoY (or just 1.2% adjusted for the leap-year effect), to 57.7bcm. Adjusted for the leap-year effect, Gazprom's production was up 1.4% YoY, while Novatek was down 1.2% YoY. Gazprom continues to outperform both the market and Novatek in terms of production growth, up 2.5% YtD, and ahead of its implied full-year target growth rate of 1-2%. Novatek's production is up 1.0% YtD, below the company's full-year target of 10%. International crude prices were up 2.6% MoM and by a more pronounced 63% YoY in February. Export netbacks declined 11.9% MoM, while domestic wellhead prices decreased 16.4% MoM. Crude-export margins stood in positive territory, averaging $4.03/bbl in Feb 2008 vs $2.42/bbl seen in the previous month. On the refined products side, prices for the domestic and export product baskets saw mixed trends in February, declining 7.1% MoM and increasing 2.4% MoM, respectively. The export netbacks for gasoline and diesel were still lower than domestic prices, and thus we continue to see a significant risk of domestic prices falling, either due to market forces or political coercion. In Feb 2008, crude exports were down 9.0% MoM, to 3,506k bpd, and down 10.8% on a YoY basis. Russian oil majors saw a mixed trend in January, with SurgutNG surprisingly topping the crude exports rankings, shipping 650k bpd to overseas markets. Gas exports (by all Gazprom group companies) in 4Q07 were up 15.3% YoY, to 70.7bcm. In Jan 2008, Russian refineries experienced a setback, and were down 1.2% MoM, to 4,690k bpd. In February, Rosneft topped the rankings (with throughput of 1,028k bpd, +1.5% MoM), while Gazprom Neft's Omsk refinery posted the largest MoM decline in its throughput among our coverage universe in absolute terms (-35k bpd).


FY07 upstream capex (for the large Russian oils only) was up 40% YoY to $15,940mn. This was driven by firmer pricing and a healthy drilling volumes increase, but also reflects that the transition from brownfield to greenfield portfolio development is evidently under way. TNK-BP's cumulative unit capex, at just $3.12/bbl of its production, remained one of the lowest among the Russian oil majors, while SurgutNG and Rosneft led the rankings, investing $6.96/bbl and $6.75/bbl, respectively. FSU oil and gas monitor This morning (31 Mar) we release FSU oil and gas monitor. Performance update. Russian oil and gas stocks were up 5.2% last week, in line with the MSCI Emerging Markets Index, but outperforming the Brent price (up 4.3%); the Bloomberg World Oil and Gas Index (up 3.9%); its peers from other FSU countries (up 2.6%); and the MSCI Renaissance Index (down 1.7%). Among the large caps, LUKOIL, Rosneft and Sibir Energy demonstrated the best performance, up 10.8%, 8.1% and 7.5%, respectively. Among the small caps, the best performers were Big Sky Energy, Frontera Resources and Volga Gas, up 75%, 16.6% and 11.7%, respectively. Our key trading idea this week is LUKOIL (LKOH.RTS, BUY, target price $112), which seems to have started closing the gap in its P/E-based valuation with its international peers (Figure 2). While the stock rocketed 10.8% in the past week, it is still trading at 24% and 23% discounts to the global average in terms of 2008E P/E and EV/EBITDA multiples (based on consensus estimates), respectively. We believe that the release of FY07 US GAAP results (expected on 10 Apr) should become an additional short-term catalyst for the stock. Our watch list for the coming week includes FY07 financial results of Arawak Energy, Caspian Energy and Tethys Petroleum, as well as West Siberian Resources' 1Q08 operating results. Chart of the week. Figure 2 shows that LUKOIL's forward P/E multiple, generally strongly correlated with that of its global peers, decoupled in Apr 2007, with the discount at one time reaching 38% (on 23 Jan 2008). This gap has narrowed to 24% since then (with 5.4 ppts covered in the past week alone), and we expect it will disappear over time, given market expectations of superior mid-term earnings growth for LUKOIL.

17. Rosneft reports reserves update Rencap April 4, 2008 Event: Yesterday (3 Apr), Rosneft released new reserves numbers audited by DeGolyer & MacNaughton. The company's proven oil and gas reserves by SPE classification rose by 8% YoY to 21.7bn boe as of 31 Dec 2007. Proven oil reserves increased by 10% YoY to 17.5bn bbl, while gas reserves remain practically flat (up by 1% YoY to 711 bcm). Rosneft posted a 301% proven reserves replacement ratio in 2007. The growth in reserves is attributed primarily to acquisition of YUKOS assets. On an organic basis, Rosneft's reserves replacement ratio was 111%.


Action: We maintain our BUY rating. Rationale: Typically, oil companies target above a 100% reserves replacement ratio and, thus, Rosneft's organic reserves replacement ratio is on a solid level. Acquisition of YUKOS assets brought Rosneft close to the top of world rankings by reserves size. In comparison, Rosneft's proven oil and gas reserves by SEC classification stood at around 15bn boe vs Exxon Mobil's 22bn boe. Yet, we believe the market has already priced in the growth in Rosneft's reserves and the news should be neutral for the stock's performance.

18. TNK-BP: sale approaching? Rencap April 4, 2008 Event: BP CEO Tony Hayward visited Moscow yesterday (3 Apr), meeting the CEO of Gazprom and the Chairman of Rosneft, prompting speculation in the local press over the future of its Russian JV, TNK BP Limited. RBC Daily reports this morning that BP is negotiating with Rosneft over a potential swap of its 50% stake in TNK BP Limited for an up to 15% stake in Rosneft. Kommersant offers a different interpretation of the meeting, saying that Rosneft suggested that BP swap its treasury shares for BP shares which it could then use to buy out the Russian shareholders of TNK BP Limited (AAR). Separately, RBC Daily also reports that Gazprom and the AAR cannot agree on the price for their 50% stake, with Gazprom willing to pay up to $15bn, and AAR wanting $30bn. Action: We retain our BUY rating on TNK BP Holding, a listed subsidiary of TNK BP Limited. Rationale: Although Gazprom's interest in TNK BP has been known for months, this is the first time that Rosneft has been named by the media as a suitor. The media articles effectively assume three possible scenarios for TNK-BP Limited's future shareholding structure: BP-Rosneft, BP-Gazprom and Gazprom-Rosneft. A 50-50 ownership of TNK BP by a Gazprom-Rosneft consortium would not be unprecedented (last year, Gazprom Neft acquired a 50% stake in Tomskneft, with the remaining 50% still owned by Rosneft). However, this could make it more difficult for Gazprom to realise the potential synergies from such transaction, in our view. Whatever the outcome, we believe neither party would be interested in having a 5% freefloat in a listed subsidiary TNK BP Holding, and would be looking to buy out minorities at fair value, which we estimate is substantially above the current share price.

19. TNK-BP: 233% organic reserves replacement Deutsche Bank April 4, 2008 TNK-BP's EBITDA exceeded USD9bn in 2007 ... which makes our forecast look optimistic According to Interfax, at the end 2007 TNK-BP's proved reserves under PRMS classification (formerly SPE) were 9.982bn boe. The total SPE reserves replacement ratio in 2007 was 297%, while organic SPE reserves replacement was 233%. The


high RRR was achieved on the back of new drilling, well fund management and improvements in water flooding systems. In addition, TNK-BP included information for its new fields, including Verkhnechonskoye (East Siberia) and two fields in the Uvat group (West Siberia). TNK-BP believes that these fields will drive its production growth in the future. Separately, the President of TNK-BP, Robert Dudley, commented that the company's EBITDA exceeded USD9bn in 2007, net profit exceeded USD5bn and revenues exceeded USD38bn. We note the financials of TNK-BP differ principally from those of TNK-BP Holding (a traded entity) in that they incorporate margins earned on the resale of Slavneft crude and oil products, as well as equity earnings from Slavneft. We are reiterating our TNK-BP Holding forecasts for 2007 but note that our EBITDA expectation of USD9.8bn may appear a bit optimistic on the back of the "over USD9bn" number for its parent company. Furthermore, our 2007 net profit forecast of USD6.3bn for TNK-BP Holding looks way "over USD5bn".

20. Victoria Oil & Gas: West Medvezhye licence and drilling update Rencap April 1, 2008 Event: Yesterday (31 Mar), Victoria Oil & Gas (VOG) announced that Russian authorities had confirmed the company's full compliance with licence conditions on the West Medvezhye gas and gas-condensate field, following the expiry of its exploration phase on 31 Dec 2007. The Ministry of Natural Resources (MNR) estimated total C1+C2 reserves (including oil in place, recoverable oil, and gas) at about 50mn boe. VOG will not be required to commence production immediately, but an initial five-year development programme covering further exploration and drilling targets should be agreed in due course with the MNR. The production phase may last until Apr 2026, with the possibility of further extension. Action: The news is short-term positive for VOG, in our view. Rationale: The confirmation of the West Medvezhye licence removes the revocation risk and opens the way for a further $8mn funding from Falcon Petroleum and other investors, as originally announced on 21 Dec 2007. Nevertheless, we believe that the market's reaction (the share price was up 51% yesterday) may be too enthusiastic, given that the reserves still need to be accepted as commercially recoverable under the international classification standards. We are concerned that low flow rates and the field's resources' difficult structure could reduce the economic attractiveness of this property despite the confirmed physical presence of hydrocarbons.

21. Construction to start 2009 for Burgas-Alexandroupolis pipeline bne April 3, 2008 Russian Industry and Energy Minister Viktor Khristenko has told reporters that a feasibility study for the Burgas-Alexandrupolis pipeline will be approved in 2008 and the construction of the pipeline will begin in 2009, according to Interfax.


22. Lukoil buys fuel storage facility from Bulgaria's Petrol bne March 31, 2008 According to RBK Daily, LUKoil Bulgaria is going to buy the large fuel storage facility Iliantsi from Petrol. The press service of the company confirms that the parties are waiting for the approval of antimonopoly agencies of the country for closing of the deal. Market players presume that acquisition of a part or all gasoline stations of Petrol by LUKoil will be the next step. However, the Russian company denies the relevant rumors already published by Bulgarian mass media. In Bulgaria LUKoil owns the refinery in Bourgas. LUKoil acquired controlling interest in the refinery in October of 1999 for $101 million. At the beginning of 2005, LUKoil increased its stake in the refinery to 93.16% having bought out 22.05% of its shares. The refinery in Bourgas produces high-octane gasoline, diesel fuel and petrochemicals complying with European quality standards. The refinery processes 6-7 million tons of oil a year. Earlier, head of LUKoil Bulgaria Valentin Zlatev said that the company was considering a possibility of purchase of gasoline stations and fuel storage facilities from Petrol. According to Zlatev, "290-300 gasoline stations will be optimal for LUKoil Bulgaria in general not to have problems with local antimonopoly law." Along with this, the company continued active independent expansion in the country. Its representative reported about plans of the company to open 50 new gasoline stations in 2007. On March 27, it was reported that LUKoil Bulgaria was going to buy fuel storage facility Iliantsi in Sofia belonging to Naftex Petrol subsidiary of Petrol. Capacity of Iliantsi amounts to 50,000 cubic meters of diesel fuel and 30,000 cubic meters of automotive gasoline. According to analyst Valery Nesterov of investment company Troika Dialog, LUKoil plans to increase its retail chain in Bulgaria by 30% by 2010. For this purpose it will need about 300 gasoline stations. At present, about 170 gasoline stations are functioning under the brand of LUKoil on the territory of Bulgaria. Correspondingly, it will be necessary to increase their quantity almost twofold. For this purpose the company needs such large objects as Iliantsi. According to analyst Alexei Kokin of investment financial company Metropol, the deal for acquisition of the fuel store facility will enable LUKoil "to earn a few cents per barrel more." Kokin adds that LUKoil Neftochim Bourgas remains the most important object in Bulgaria for the company. The expert remarks that the company is also interested in broadening of the retail chain in Bulgaria and other countries of the region. Earlier, the company expressed its interest in gasoline stations chains and planned to invest approximately $1 billion in development of business in Bulgaria until 2011.


23. Russia to spend $20m on feasibility study on CPC expansion bne April 3, 2008 Transneft Vice President Mikhail Barkov has said Russian participants in the Caspian Pipeline Consortium (CPC) have proposed investing $20m to update the feasibility study for expanding the Tengiz-Novorossiisk oil pipeline, writes Interfax. Barkov said increasing the CPC's handling capacity by 30 million - 35 million tonnes of oil would be synchronized with commissioning of the Burgas-Alexandroupolis pipeline. "The bulk of the increment will go to the Burgas-Alexandroupolis pipeline," he said, according to Interfax. CPC owns the 1,580 kilometer long Tengiz-Novorossiisk oil pipeline, which links oil fields in western Kazakhstan and Russia's Black Sea coast. The CPC pipeline pumped 32.6 million tonnes of oil in 2007. It earned a profit for the first time in 2006. The CPC's debt is estimated at about $5bn, according to Interfax.

24. West Siberian Resources provides operational update Rencap April 4, 2008 Event: West Siberian Resources provided an operational update yesterday (3 Apr). The company's crude production reached new highs in 1Q08 - 3.2mn bbl, up by 40% YoY. Average daily production rose from 25k bpd in 1Q07 to 34.8k bpd in 1Q08. Production in the Timan-Pechora region increased the most (up by around 80% YoY), followed by Tomsk region (up by around 50%). Production in Volga-Urals remained practically flat (up by 2% YoY). WSR reiterated its annual production guidance of 15mn bbl (excluding Alliance). Action: We maintain our BUY rating. Rationale: The stated production in 1Q08 accounts for roughly 20% of our annual target guidance for all WSR producing regions. In 1Q08, WSR initiated a drilling and development programme and, as a result, intense field activities limited production growth. We believe West Siberian is on track in achieving its production targets. Earlier this year, WSR announced a merger with Alliance Oil Company, which should contribute an additional 3mn bbl in production this year.

25. A Tale of Two Opposites: Integra vs. Eurasia Drilling Alfa April 1, 2008 How to profit from the impending boom in the Russian OFS market? The rising tide will probably lift all boats, but some more than others. At this time, we prefer the simplicity of EDC (BUY) over the complexity of Integra (HOLD) and believe the former offers a more favorable risk-return profile. The OFS industry is poised to grow at double-digit rates: Declining production rates and years of underinvestment in exploration and production have generated strong,


sustainable demand for oilfield services that will last for years to come. High oil prices, as well as the potential for reduced taxation in the oil industry even beyond that recently announced, underpin the case for strong, multiyear, double- digit growth in the Russian OFS industry. Integra: Complexity in transition: Originally viewed as a potential consolidator of the industry, Integra is now focusing on organic growth and efficiencies, implying it will grow somewhat more slowly than the market, ourselves included, had been expecting. In the immediate future, the stock may trade below our target as market expectations adjust from consolidation to internal-growth mode. However, the industry's growth potential and size may mitigate some of the shortcomings we see in Integra's business model. Downgrading INTE to HOLD, TP to $11.90: We have reduced our previously aggressive forecasts for growth in the company's drilling and seismic segments. Moreover, the manufacturing division's potential for profitability and sustainable performance, as well as its voracious appetite for cash, is a source of uncertainty in our forecast. We need more tangible evidence that this broad collection of businesses with different levels of capital requirements, profitability and barriers to entry can be profitably and efficiently managed. That evidence may become available with the upcoming releases of FY2007 results and the company's strategic plan in May. EDC: The beauty of simplicity: The company's very simple business model and consistent execution, along with its coherent message to the market, bode well for the stock. We like the earnings visibility and low level of risk, as well as the efficiencies of scale and dominant presence in certain oil-producing regions. Moreover, the company has sufficient funding to take advantage of additional expansion opportunities. Reiterating EDC as BUY, upping TP to $35.8 from $27.8, with slightly higher drilling volumes and better expected profitability as the primary reasons behind the increase in target price. The OFS industry The industry is poised to grow at double-digit rates for many years, according to Douglas-Westwood and our own estimates. The drilling, workover and technological segment is expected to grow by 15% per annum for the next several years. The drilling segment will likely grow at 9% per year, and the seismic-data-processing segment has the potential to grow at 14% annually. Demand for drilling rigs is also growing in the double digits. These figures leave no doubt that OFS companies operate in a very attractive environment. The industry is in transition, new players will likely emerge, competition will increase and those companies able to create sustainable advantages will likely exhibit higher-than-average growth rates. Integra Very complex business model: Integra is highly diversified across a broad range of OFS activities, including drilling rig and equipment manufacturing. These different businesses within the oilfield services industry have varying levels of capital requirements, profitability and barriers to entry. High demand for capital from one segment may starve another of capital needed for expansion or the acquisition of


competitive advantages. In particular, the manufacturing segment currently absorbs large amounts of capital resources that otherwise would probably be invested in the drilling and/or formation- evaluation businesses. Changing investment theme: Originally viewed as a potential consolidator of the industry, Integra is now focusing on organic growth and efficiencies, which imply somewhat lower growth than the market, ourselves included, had been expecting. Fair degree of execution risk and low earnings visibility: The company is very complex and difficult to manage. We note that there is a fair degree of execution risk, and Integra's earnings are of poor quality following its pre-IPO acquisition spree as a fair amount of accruals accumulated on its books. Some of the business units do not have a long enough track record to reassure us that their current profitability will be sustainable. The industry's growth potential and the high demand for OFS services have created a window of opportunity for Integra to streamline its operations and deliver on its stated objectives. We remain cautiously optimistic, though we have lowered our expectations and would like to wait for tangible evidence that such a broad collection of businesses can be managed profitably. That evidence may become available in May, as the company is due to release both its FY2007 results and its forward-looking strategic plan. Eurasia Drilling Very simple business model: EDC is the complete opposite of Integra in many aspects. First and foremost, we like its simplicity. This company only does drilling and workovers, and it has no intention of getting involved in seismic data acquisitions, logging and/or manufacturing. This simplicity makes the company relatively easy to manage, and we think that EDC has the opportunity to build a unique competitive advantage by developing necessary support infrastructure in the regions it operates in, building goodwill with its customers, widening the range of products and services it offers, and creating barriers to entry for its competitors. Stable investment theme and low degree of execution risk: EDC continues to execute well, its message to the market since the IPO is largely unchanged and the execution risk is relatively low. Good earnings visibility: The demand for drilling is robust; EDC has sufficient capital resources to finance capacity expansion; its relationship with LUKoil guarantees a minimum level of drilling volumes; it has the opportunity to expand offshore operations. Based on our forecasts, EDC is trading in line with its peers for 2008 and is somewhat undervalued based on 2009 multiples. Integra, however, trades in the higher end of the range, in line with the best companies in the sector for both 2008 and 2009.

SECTOR High Tech 26. Russian Technologies to incorporate 33 holdings bne April 4, 2008 Sergei Chemezov, head of newly-created state corporation Russian Technologies, has said that the corporation intends to create 33 holdings comprising 300


companies, the majority of which will float shares on the market, according to Interfax. The process of determining which state-owned companies are to be transferred from the Federal Agency for State Property to Russian Technologies is ongoing.

27. Rosimushestvo transfers 20% stake in Arzamas Instrumental Plant to Almaz-Antey Rencap April 4, 2008 Event: Rosimushestvo transferred its 20% common share stake in Arzamas Instrumental Plant to state-owned Almaz-Antey, producer and designer of anti-aircraft and non-strategic anti-missile defense systems. The deal was signed on 1 Apr. Action: The news is neutral for Arzamas Instrumental Plant. We reiterate our BUY rating. Rationale: The news was expected and will not have any material effect on the stock price, in our view. Two major events will affect the performance of the company's stock price in the near future: release of FY07 financials (which we expect to be strong and demonstrate one of the highest operating margins among Russian engineering peers) and dividend payout (which we expect to be quite significant). We remain positive on Arzamas Instrumental Plant.

28. Jabil might build a plant in Russia bne April 4, 2008 General director of the Electronics Publishing House, Ivan Pokrovsky said that Jabil was going to construct a plant in Russia, writes evertiq. According to Mr. Pokrovsky, Jabil will produce LCD TV and DVD players at the plant in Russia. The final decision will be made in August 2008, Mr. Pokrovsky told Cnews. During a shareholder meeting in August 2007, Jabil's CEO Mr. Tim Main said that the company sees the future in Russia. Today Jabil has an expanding presence in China, India, Mexico, Vietnam and Ukraine. Jabil said the company would not like to announce the possible location site.

SECTOR Metals and Natural Resources 29. Alrosa to go Africa bne March 31, 2008 Alrosa, the world's second-largest diamond miner, has said it would look to participate in African resources, including diamonds, oil and gas. "We should use any chance to increase our resource base in Africa," company president Sergei Vybornov said Saturday at a meeting, according to the transcript posted on the company's web site, according to Bloomberg. "Control over resources means control over the market."


The world's largest consumers of mineral resources, including China and the United States, are all converging on Russia, Vybornov said. China has been bolstering its presence in Africa 10-fold each year, he said., according to Bloomberg. Alrosa will expand in Africa through diamond, oil and gas exploration projects, as well as energy and construction, helping build hydropower plants in Namibia, the Democratic Republic of Congo and other countries in Africa, spokesman Andrei Polyakov told Bloomberg by telephone. Alrosa may build housing and infrastructure in Angola and is also considering construction projects in Congo and Namibia. Alrosa already has two diamond mines in Angola, as well as an oil and gas exploration joint venture, according to Bloomberg.

30. FAS investigating prices for steel used in pipes UralSib April 4, 2008 Investigation requested by oil companies and pipe sector lobby group. The Federal Anti-Monopoly Service (FAS) has started investigating the pricing mechanism for steel used in pipemaking by the major flat steel producers (Severstal, NLMK, Urals Steel and MMK). The investigation was initiated at the request of Gazprom Neft, Surgutneftegaz and the Pipe Industry Development Fund, a pipe industry lobby group, as the steelmakers are apparently trying to push through a hike in domestic prices in line with a general rise in global steel prices. The pipemakers and pipe consumers are trying to resist this increase. (Please see the note released yesterday.) Resistance to steel-driven price increases. The investigation suggests that resistance is increasing to the surge in steel and pipe prices. Although at this stage we believe price regulation is unlikely, we question the sustainability of the domestic price premium in flat steel, given that Russia is a net exporter of flat steel. This news is likely to have a negative impact on the share prices of NLMK, Severstal and MMK, in our view. However, we would be buying into weakness as we do not expect price caps, and steel prices (both domestic and export) are still likely to rise relative to our and consensus forecasts, resulting in earnings upgrades. At this stage we do not expect a negative impact on the margins of TMK and reiterate our Buy recommendation on the stock.

31. Magadan Region proposes $500m coal project to South Korean company bne April 2, 2008 Russia's Magadan Region has proposed to South Korean company Kor-Kross that it implements a $500m project to produce and process brown coal in the Magadan, writes Prime Tass. The project includes development of the Lankovskoye and Melkovodninskoye brown coal fields in the region, with probable reserves amounting to 2.2bn tones, and the construction of a coal processing plant there.


The Kor-Kross specializes in developing information technologies and investment in energy. The company also runs a plant producing plasma TV sets and a timber processing plant, writes Prime Tass.

32. Oriel Resources acquisition UBS March 31, 2008 Mechel announces offer for Oriel Resources: On 26 March, Mechel announced an all cash offer for the entire share capital of Oriel Resources. The offer values the issued share capital of Oriel at c$1,498 mn. Mechel has already received commitments with respect to 46.6% of Oriel's issued share capital. Oriel is developing a promising vertically integrated chrome project: Oriel is a developing company whose main assets include the Tikhvin ferroalloy plant near St. Petersburg (started production in April 2007) and the Voskhod chrome mining project in Kazakhstan (to start production in 3Q2008). The company is also developing the Shevchenko nickel project in Kazakhstan. Ferrochrome market is in structural deficit: The ferrochrome market is now experiencing a structural deficit following growing demand for product and power disruptions in the main producing country-South Africa. FeCr and chromite ore prices are currently at all time highs. We believe this market will remain tight in the coming years. The $1.5 bn offered price appears justified: 2008 should be the first year Oriel starts to generate income. In 2009, the Tikhvin plant should operate at a 148 ktpa capacity using ore from Voskhod. If we apply the current spot FeCr prices and use cash costs guided by the company, we conclude that Mechel valued Oriel Resources at its own or even lower on EV/EBITDA multiples based on 2009 planned production. Our unchanged PT on Mechel remains DCF based.

33. Polyus explores Devil's Trough Deutsche Bank April 1, 2008 Polyus Gold has announced the completion of its exploration programme and JORC audit at the Devil's Trough (Chertovo Koryto) deposit in the Irkutsk region. According to MICON's report, proved and probable reserves at Chertovo Koryto amount to 43.61m tonnes of ore at 1.83g/tonne, and 79.96 tonnes (2.6m oz) of gold. Measured and indicated resources amount to 50.49m tonnes of ore at 1.84g/tonne, and 92.95 tonnes (3m oz) of gold. In addition, inferred resources amounted to 2.09m tonnes of ore at 1.64g/tonne, and 3.4 tonnes (109koz) of the metal. We note that the calculation was based on a cut-off grade of 0.8 g/tonne and a gold price of USD625/oz. As a result of completing this work, Polyus Gold's total proved and probable reserves increased by 3.8% to 71.2m oz.


34. Rusal to close Norilsk deal by end-April UralSib March 30, 2008 Rusal acquisition of 25% in Norilsk may be completed by end-April. UC Rusal has re-signed a $4.5 bln financing agreement with a consortium of international banks to fund its acquisition of 25%+1 share in Norilsk Nickel (GMKN - Hold), Interfax reported on Friday. The second signing took place on Friday, making the loan available for drawdown. According to Vedomosti, the deal between Mikhail Prokhorov's Onexim and Rusal will be closed by the end of April. The news is neutral in our view, as the key terms of the deal are likely to remain unchanged. The terms of agreement remain intact. Previously Rusal had signed a $4.5 bln loan agreement with the consortium on March 10 and the drawdown of the funds had been expected by March 14. The loan was delayed due to minor technical amendments, though the terms of the loan remain intact. According to the original agreement, signed in November, Onexim agreed to sell Rusal its 25%+1 share stake in Norilsk for an 11% stake in UC Rusal and a balance to be paid in cash. Rusal to miss initial deadline for the deal. In our view, it now looks highly likely that Rusal will miss the initially targeted date of March 31 for the completion of the deal. It is not clear whether the original deadline was a contractual obligation between Rusal and Onexim or just preliminary guidance to the market. We believe the key terms of the deal will remain intact. Once Rusal has completed the deal with Prokhorov by the end of April, we believe a similar deal with Vladimir Potanin (Norilsk's other key shareholder) will follow, implying potential dilution risk for minorities. We maintain a Hold recommendation on Norilsk Nickel, as we expect the uncertainty over the shareholder structure to result in relative underperformance of the stock. Michael Kavanagh, [email protected]

35. Silvinit plans to pay in full for Polovodovsky licence Rencap April 4, 2008 Event: Russian potash producer Silvinit has announced that it will pay RUB35.14bn for a licence for the Polovodovsky site, on the Verkhnekamskoye deposit, in full, despite opposition from Silvinit's minorities, headed by Madura Holding (which owns Uralkali). Silvinit has stated that it requires a majority of shareholder votes at the EGM (rather than 75%) for the approval of the loan. Shareholders will decide on the approval of large-scale deals at the EGM, scheduled for 19 Apr and 3 May 2008. Action: We reiterate our HOLD rating on Silvinit. Rationale: The financing of the licence acquisition by Silvinit is not transparent. The company controls only 45% of JV Kamskaya Mining company, the rest is controlled by VSMPO-Avisma, which disagrees with the price to be paid per licence, and by other financial participants.We believe this acquisition should be financed pro rata, but it is possible that Silvinit will finance it in full measure, significantly leveraging its balance sheet.


SECTOR Power 36. Utilities Sector: Announced retail tariff growth above our expectations UralSib April 1, 2008 Generally positive for the sector. Sergei Novikov, the head of the Federal Tariff Service, yesterday announced that retail electricity prices for end consumers will rise by 20-23% in 2009, Interfax reported. Retail electricity prices are composed of both regulated tariffs and liberalized wholesale prices for generation companies, and regulated tariffs for electricity distribution and transmission companies. We estimate that the average retail tariff will rise by 18%, hence we consider the news to be generally positive for the power utilities sector, as such price increases would likely prompt us to revise our financial forecasts upwards and would support positive market sentiment. Our top picks in the sector remain RusHydro (HYDR - Buy), UES (EESR - Buy) and several distribution companies: Permenergo prefs (PMNGP - Buy), Sverdlovenergo (SVER - Buy) and Chelyabenergo (CHNG - Buy). Breakdown by segment as yet unavailable. Once the details of retail tariff structure for 2009 are announced, it will be possible to evaluate the likely impact on each segment (generation, distribution and transmission). According to our models, the average electricity price for generators will grow by 22.3% in 2009, while the average regulated distribution tariff (which includes a transmission tariff) will grow by 12.4%. We forecast the following breakdown in 2009: 61% to generators, 29% to distributors, 6% to Federal Grid Company (transmission) and the remaining 4% to retail sales companies as their profit margin. In 2008 we estimate generators will receive 59% of the retail price, distributors 31%, transmission 7% and retail sales 4%. Reform close to completion; UES a good entry point. We continue to remain bullish on the growth prospects for the domestic power utilities sector. With the restructuring of UES almost complete, the wholesale electricity market fully functional, ongoing price liberalization and the introduction of distribution and transmission tariff reforms, we see no further execution risk for sector-wide reform, which is aimed at promoting economically efficient behaviour and attracting private capital to the sector. We believe UES shares provide a good entry point to the sector as they effectively represent a diverse basket of companies that will be spun off in July. UES's current market price of $1.04/share offers 46% upside to its sum-of-the-parts valuation based on the market prices of its subsidiaries, hence we reiterate our Buy recommendation.

37. Gazprom moves closer to TGK1 control Rencap April 1, 2008 Event: Quoting the company's eurobond memo, Reuters reported yesterday (31 Mar) that Gazprom is planning to announce a buyout offer to TGK1's minority shareholders to bring its shareholding to a controlling stake. Via the purchase of an additional share issue, Gazprom has already acquired a 47% TGK1 stake and has now been given the go-ahead from the anti-monopoly service to accumulate up to 100% of the company. Other TGK1 shareholders include Fortum with a 25% stake


and Norilsk Nickel with 6%. On the back of the news, TGK1's share price rose 7% yesterday. Action: Short-term positive for TGK1 share price, in our view. Rationale: Even though the nominal sale of the additional share issue of TGK1 to Gazprom at a price of RUB0.035 ($0.0014) - implying $655/kW - was approved by TGK1's board as long ago as 14 Sep 2007, we believe that lack of anti-monopoly clarity with respect to Gazprom's participation in the issue has made investors wary of TGK1. Anti-monopoly approval and yesterday's announcement of Gazprom's offer pushed TGK1's market value to $612/kW. We calculate that, at this price level, purchase of TGK1 shares and a subsequent buy-out by Gazprom at $655/kW should produce an annualised return of around 13%.

38. Gazprom sets sights on electricity supply companies Rencap April 2, 2008 Event: Yesterday (1 Apr) Kommersant reported Denis Fedorov, head of Mezhregionenergosbyt electricity-supply company controlled by Gazprom, saying that Mezhregionenergosbyt wants to acquire control of four electricity-supply companies which UES plans to auction in 2Q08. Kommersant reported that Mezhregionenergosbyt is focusing on those electricity suppliers which operate in the regions where Gazprom-controlled generating companies are located. Presently Gazprom controls TGK3, and is set to receive controlling stakes in OGK2, OGK6, and TGK1. In addition, a planned joint venture with SUEK will give Gazprom controlling stakes in TGK-12 and TGK-13. Action: Positive for shares of Mosenergosbyt (MSSB), Peterburgskaya Supply Company (PBSB), Samaraenergo (SAGO), Saratovenergo (SARE), Stavropolenergosbyt (STSB) and Rostovenergo Suppy Company (RTSB), in our view. Rationale: On the basis of Gazprom's extensive portfolio of electricity-generation assets and of the list of forthcoming UES supply auctions of stakes in supply companies, we judge that MSSB, PBSB, SAGO, SARE, STSB and RTSB are the obvious contenders for Mezhregionenergosbyt's attentions. If Gazprom acquires control of these companies in the UES auctions, the company will be obliged to make offers to minority shareholders at the same price level.

39. Hydro OGK seeks to reduce capex expenditures Deutsche Bank April 3, 2008 According to Interfax, Hydro OGK intends to reduce its five-year investment programme by 1GW on the back of, amongst other reasons, the increased cost of materials and the delay in discussions about schemes for connecting capacity to the national grid. The CEO of Hydro OGK, Vyacheslav Sinugin, noted in particular that Hydro OGK, together with RusAl, had postponed the Bogouchansk project for a year (the joint construction of a 3GW power plant and aluminium smelter). No further information was disclosed. The new programme is to be considered by the respective


government bodies while Sinugin expects it to be approved by the genco's Supervisory Board in May. Separately, the newswire reported that Hydro OGK and Polyus Gold had signed an agreement of intent to supply electricity to Natalka beneficiation plant from the Kolymsk and Ust-Srednekansk HPPs (the latter is still under construction). No details regarding pricing or supply volumes were reported. In our view, Hydro OGK's huge capex programme, which comprises a large number of disparate projects, is the main uncertainty over the company's investment case. Any reduction of the capex expenditures and, more importantly, detailed information about the precise investment plans (and not only for the five-year period) would be very positive for the genco in our view. Rencap writes: The HydroOGK's original investment programme foresaw the introduction of 22.2 GW of new capacity by 2020, at a total cost of almost $65bn. In our view, this is a highly ambitious plan and it is reassuring to see that cost is not entirely ignored. However, this is - and will remain - a state-run company and we have yet to be convinced that these plans are based on the rather fundamental premise for most companies of creating financial value for shareholders

40. N Novgorod NPP to cost over $10bn bne March 31, 2008 Sergei Kiriyenko, the CEO of state-owned nuclear power monopoly Rosatom, told reporters that investments in a nuclear power plant in Nizhny Novgorod Region will exceed $10bn, according to Interfax. The plant is to have four generating units with a capacity of 1,150 megawatts (MW) each, and construction starting in 2016.

41. Ukrainian Energoatom signs contract with Westinghouse for nuclear fuel supplies April 1, 2008 Event: Ukrainian Energoatom has signed a five-year contract with American Westinghouse, which should supply at least 630 nuclear fuel assemblies (FAs) in 2011-2015. The price has not been disclosed. The major pre-condition is the certification of Westinghouse's FAs by the Ukrainian State Committee on Nuclear Regulation (SCNR). If the fuel is not certified, Energoatom is permitted to terminate the contract. The head of the SCNR, Elena Mikolaychuk, said that certification would not be completed earlier than 2010. Action: The news is negative-to-neutral for TVEL and Novosibirsk Chemical Concentrates Plant. However, we remain positive on Russian nuclear cycle producers and re-iterate our BUY ratings. Rationale: The change of supplier from TVEL to Westinghouse is negative for TVEL, currently the monopoly supplier. The annual losses at current prices are estimated at $70-75mn (estimated revenue in 2007 is $1.05bn). However, we expect that future contract prices will be increased at least 2.5-3x, so that the negative effect from


falling volumes will be compensated for with increased prices as well as the expansion of contracts with Russian and foreign customers. We view the change in suppliers as political decision since Westinghouse's fuel is 50% more expensive and of worse quality, in our view.

SECTOR Retail, FMCG 42. Heineken to invest 115m euros in Russian breweries in 2008 bne April 3, 2008 Dutch brewing company Heineken plans to invest 115m euros in its Russian breweries in 2008, Roland Pirmez, CEO of Heineken Russia, told reporters, according to Interfax. In 2007, the company's Russian investments amounted to 100m euros. Most of the investments will be spent on increasing the production capacity of Heineken's plants in Nizhny Novgorod, Yekaterinburg and Irkutsk, Pirmez said. Heineken owns 10 breweries in Russia.

SECTOR Telecom 43. Comstar gets an LD license in Armenia Rencap March 31, 2008 Event: According to Kommersant today (31 Mar), Comstar has received an LD license in Armenia. Previously, the Armenian LD and Internet access market was monopolised by Armentel, aVimpelCom subsidiary. Comstar plans to obtain number capacity in April. The network will be based on WiMAx technology. The company plans to become a national Armenian operator by 2012 and be the second in fixed-line voice services and the first in Internet access services. Action: We reiterate our HOLD ratings for Comstar and VimpelCom stock. Rationale: We think Comstar should benefit from the de-monopolisation of the telecommunications market in Armenia. The LD license is the first step in the company expansion. The most lucrative market in the country, in our view, is the underpenetrated Internet access. However, a business model based on WiMax technology is unproven and we see risks there. As for VimpelCom operations, the company is likely to face more competition but the share of Armentel in consolidated results is very low. That said, the Armenian telecommunications market is quite limited in size, with 3mn people living in the country.


44. Comstar launches long-term management incentive programme Rencap April 1, 2008 Event: Comstar announced yesterday (31 Mar) that its board of directors has approved the introduction of a long-term management incentive programme. The programme is set to run from 1 Apr with a two-year vesting period. A total of 151 managers will participate in the scheme during 2008-2010. So-called 'phantom' share options are to be granted. Programme participants will be entitled to receive bonuses at the end of the two-year period. The bonus value will be calculated on the basis of changes in the price of Comstar GDRs. A total of 15,105,882 'phantom' share options, representing 3.6% of Comstar's share capital will be granted. The bonuses will be received provided that certain corporate performance criteria have been achieved. Under the terms of the new scheme, the granting of share options and bonuses in the form of shares, under the 2007-2009 programme, will be discontinued. A total of 10 individuals currently have options under the 2007-2009 scheme, which are exercisable in Nov 2008 over a combined total of 0.575% of the company's share capital. Action: We reiterate our HOLD rating. Rationale: We see the new option programme as positive for Comstar as more members of management will be incentivised; 151 vs 10 previously. On the other hand, the programme has increased from 0.6% to 3.6% of the company's share capital, and Comstar will not buy shares in the market due to the introduction of the 'phantom' share options.

45. Effortel Russia to enter LD market Rencap April 4, 2008 Event: According to Kommersant, Effortel Russia, owned by the head of the Russian Corporation of Nanotechnologies, Leonid Melamed, is to enter the long-distance (LD) market. The company has submitted an application to receive LD codes and plans to launch LD services this autumn. According to Effortel Russia, the corporate segment will be their priority. The investment in LD development amounted to $20mn in 2007. Action: We see the news as neutral for the market. Rationale: The emergence of a new player is to further intensify competition in the LD market. Currently there are seven players: MTT, Golden Telecom, TransTelecom, Orange, Arktel, Synterra and Rostelecom. Comstar is also due to receive LD codes. The lucrative corporate market is hard to penetrate, in our view, and Effortel Russia is likely to face fierce competition from the already well-established players. We believe in terms of the retail market, the newcomer will primarily threaten Rostelecom's position and the company is already losing market share to its competitors. The major reason is that Rostelecom's tariffs are regulated while other players provide more competitive price offerings to the clients.


46. MTS bids for SMARTS Rencap April 3, 2008 Event: Today (3 Apr), Vedomosti reports that MTS has offered $1bn for SMARTS, the mobile operator in the Volga Region. The price includes SMARTS debt of $200-250mn, as well as a premium for the change in SMARTS' legal structure. In 9M07, the regional operator had revenues of RUB5.66bn ($219mn) and an EBITDA of RUB2.29bn ($88.4mn). According to ACM-Consulting, SMARTS had 4.03mn subscribers as of the end of Feb 2008. Action: We reiterate our BUY rating on the stock. Rationale: As we expected, the change in SMARTS' legal structure made it available for external investors, and hence the price for the company went up. Previously, VimpelCom had offered $700-750mn and Tele2 would have paid $700mn for the asset (the prices include debt). However, Volgatelecom, the minority shareholder in the company, disputed the conversion of the company into a OJSC, which creates risks for potential buyers. The purchase of SMARTS should strengthen MTS' position in the Volga Region, and eliminate SMARTS as a competitor. Given SMARTS low ARPU of $6.4 in 9M07, we think the reported price of $250 per subscriber seems reasonable although on a 2007 EV/EBITDA basis, MTS would pay roughly a 12% premium to its own trading range. Overall, we see the potential deal as positive for MTS, as the company could substantially enhance its subscriber base in the Volga Region and get rid of a strong player in a quite competitive market at a reasonable EV/Subscriber multiple. That said, MTS expansion strategy was based on M&A in previous years (compared to VimpelCom's primarily greenfield build-outs) and the company has a mixed track record integrating acquired assets.

47. Sistema's Shyam Telecom obtains Indian CDMA frequencies Deutsche Bank April 4, 2008 Shyam Telelink obtains CDMA frequencies in seven Indian states Shyam Telelink received licences to provide mobile and wireline services in January Near-term economics of Sistema's national build-out in India look fairly challenging SSAq.L Interfax has quoted India's Economic Times as reporting that Shyam Telelink, an integrated operator in Rajasthan (population of 62 million) which is 51%-controlled by Sistema, had become the first operator to obtain 2.5MHz frequencies to provide CDMA mobile service in seven Indian states, including Assam and Jammu & Kashmir. The paper also reported that the Indian telecommunications regulator is set to allocate GSM frequencies to the mobile players, possibly as early as next week. Sistema has not commented, but according to the same source the operator has already started rolling out its network and expects to start providing telecommunication services by the end of the year. Shyam Telelink received licences to provide both mobile and wireline services in 22 of India's licence territories in January (thus the licence package now covers practically the whole country). Sistema acquired 10% in the operator back in September 2007 and in October


increased its stake to 51%. Sistema has guaranteed USD520m of the total USD630m which is to be paid for the licences. The combination of India's vast population and its under-penetrated mobile market could potentially be a source of long-term value creation on a scale comparable with that which Sistema experienced with MTS. The visibility on the potential pace and magnitude of such value-creation is improving. However Sistema is among four other potential newcomers to the market, which already has at least six meaningful players. While a long-term case can be constructed that the size of India's population and low wireline spend create room for a greater number of profitable players, the near-term economics of Sistema's national build-out in India may look fairly challenging. On balance, while the further licensing/spectrum (Shyam Telelink does not yet have a GSM licence) allocation progress in India is likely to strengthen the case for arguing that the Sistema stock is not just a SOTP of its listed assets, we suggest that visibility will remain too low to attach anything more than an 'option value' for Sistema's Indian project over the next twelve months.

SECTOR Transport 48. RZhD to electrify an Iranian railroad bne March 31, 2008 Russian Railways has signed a contract with Iranian Railways on the electrification of a railroad, the Russian company said in a statement, writes Interfax. RZhD President Vladimir Yakunin and Iranian Railways President Hasan Ziyari met as part of a visit of an RZhD delegation to Iran

49. RZD suggests increasing tariffs for export coal shipments Deutsche Bank April 2, 2008 Kommersant has this morning quoted a suggestion by Vladimir Yakunin, the CEO of Russian national railways operator RZD, that tariffs for coal shipments should either be increased this year or subsidised from the budget. According to the paper, Yakunin is only proposing an increase for export deliveries of hard coal which, according to him, are highly unprofitable for the monopoly. We note that domestic power plants (such as OGK-5's Reftinskaya and OGK-2's Troitskaya) mainly produce electricity from low quality brown coal and also that, in the majority of cases, the shipment distances to power plants are less than those for export. At this stage, therefore, we do not see any threat for the domestic coal-driven electricity producers. In particular, we believe that it is not rational to increase the coal transportation tariffs for power plants further, especially given the government's call to expand their share in the national fuel mix. However, we do not completely rule out the risk of transportation tariffs being increased fairly going forward.


50. Hymer to build motorhome plant in Russia bne April 2, 2008 Germany's Hymer AG is considering a plant in Russia for the production of motorhomes, writes Prime Tass. The plant will be built when the company's sales in Russia reach 2,000 units per year. In 2007, Hymer"s sales reached 200 units and are expected to increase to 500 units in 2008.

51. Ruscon-T to build $19m container terminal in Leningrad Reg bne April 3, 2008 Ruscon-T plans to build a container logistics terminal in Leningrad Region for $19m, writes Prime Tass. Total capacity will be 80,000 twenty-foot equivalent units (TEUs).

SECTOR Agriculture 52. Auchan is to work more with Russian food producers bne April 3, 2008 French trading company Auchan is to work more with Russian food producers, the Agriculture Ministry said in comments on a meeting between Agriculture Minister Alexei Gordeyev and Chairman of the Auchan Board of Directors Christophe Dubrulle, OOO Auchan Director General Jean Pierre Germain and other representatives of the company, according to Prime Tass. "Regional producers will sign long-term contracts with the trading company," he said, according to Prime Tass. "There will be an alliance between AVK Exima [the main owner of the Mikoyan meat factory] and Auchan for forming the Russian market of refrigerated meat. Therefore, relations between producers and sellers will be harmonious and balanced."

53. John Deere to put $80 million into project in Russia bne April 1, 2008 U.S. corporation John Deere, the world's leading manufacturer of agricultural machinery, plans to invest $80m in a facility in Russia to comprise units for personnel training and for the storage of spare parts and finished goods, the Russian Agriculture Ministry said on Tuesday, writes Interfax. The facility will be located in Kaluga and start operation in 2010.


SECTOR Automotive 54. A Renault u-turn urgently needed as Russia outgrows Avtovaz Graham Stack in Moscow April 3, 2008 Four months after the sensational announcement that turnaround experts Renault would become strategic investors in Russia's Soviet-era car giant Avtovaz, analysts are hoping the company will now unlock a new class of low-income car owner. It had been a long time since the producer of Lada cars, traditionally associated with gangland slayings and financial manipulation, made positive headlines, but December's news that Carlos Ghosn's Renault would take a 25% stake in Avtovaz caused a stir. The match between Russia's ailing un-restructured car giant and Renault's legendary turnaround star Ghosn, the man who single-handedly rescued Japan's Nissan from the verge of bankruptcy, seemed perfect. Could he do the same this time, or had he bitten off more than he could chew? "I was absolutely astonished. I refused to believe the reports, thinking the story was just groundless rumours, until it was confirmed officially," is how Trust investment bank's automotive analyst Aleksandr Yakubov recalls his surprise. The surprise was all the greater because Avtovaz had been effectively renationalized in 2005, in a quite bizarre form: Russia's state-owned arms exporting monopoly Rosoboronexport (ROE) had taken control, dislodging the previous management who controlled the company through an opaque system of cross-ownership by subsidiaries, and sending in whole battalions of riot police to expel criminal gangs from the premises. Since ROE favours a policy of consolidating companies in sectoral holdings under state ownership, there were suspicions that moves were afoot to set up some national automotive corporation together with truck producer Kamaz and other Russian producers - and call on state funding to re-launch the Russian car industry. So it was a welcome surprise when ROE saw the light and called in Renault - banking $1bn for a 25% stake that had cost them a fraction of that. While the ROE decision was surprisingly enlightened, analysts wondered about whether the same was true of Renault's involvement in the troubled car giant. With only a 25% stake, how could they hope to turn the company around? Renault simply referred to the fact that they had bought into the biggest brand on what will very soon be Europe's biggest market. And that it was very much the "people's car" brand they were interested in. Europe's largest car market With the value of Russia's car market growing 57% in 2007 to $53.5bn, making it set to overtake Germany to become Europe's largest in 2008, Avtovaz, Russia's dominant car producer with 24% of the market, should be looking up. Purely in volume terms, the market increased 36% on year to 2.75m cars, according to European Intelligence Unit. And growth is set to continue, driven by surging


disposable incomes, which have increased twofold since 2000, and are currently growing at 10% on year. And a new wave is already breaking, with a surge in auto loans facilitating car purchases. Over 2002-2006, the proportion of new cars purchased on credit exploded from 7% to 42%. According to Autostat estimates, in 2007 new car credit grew 89% on year to $17bn. "Already in the near future," says Renaissance Capital's transport analyst Eduard Faritov, "this proportion could reach the European level of 60-80%." But this will still be just the tip of the iceberg: car penetration in Russia, despite a two-fold increase since 1993, is still astonishingly low. Even after a decade of strong growth, there are only about 185 cars per thousand people in Russia, compared with 205 per thousand in Central Europe, and dwarfed by the 450-600 per thousand level common in Western countries. And, according to Faritov, half of that car fleet is older than 10 years and in urgent needing of replacement. All this of course looks like great news for Avtovaz - only it isn't. While Avtovaz initially capitalized on Russia's rebound after 1998, boosting production substantially through 2001, subsequently its sales stagnated. Why? The Russian market is simply outgrowing Avtovaz, say analysts. "The market structure has changed dramatically, and is continuing to change dramatically," says Faritov. "The structure of demand has shifted away from cheap cars. The average car price is now $20,000 - twice that of 2002. Lada cannot capture this demand." Yakubov agrees. "Avtovaz is looking very vulnerable. Higher incomes in Russia combined with retail credit and car loans are paradoxically translating into lower sales for Russian-made passenger cars - and Avtovaz, in contrast to the other Russian automotive producers, is completely exposed to the passenger car market." According to Renaissance Capital, the largest price segment in value terms is now the premium car segment (over $40,000), amounting to $10.9bn, or 20%, of the total passenger car market. The value of the $20,000-plus market is now larger than that of the sub-$20,000 segment. The shift in market structure is exemplified by the shift from used-car imports to new imports as the main alternative to Russian production. The new imports segment has grown at almost 70% per year over the past five years, increasing to more than 61% of the total market in 2007, from 17% in 2001. In 2002, used-car imports formed the largest segment in value terms ($4.8bn), followed by Russian cars ($3.6bn) and new imports ($2.3bn). By 2007, the situation had reversed: new imports segment ($32.8bn) had become the leader, followed by Russian-made foreign brands ($7.62) and used imports ($4.9bn). If this was not alarming enough for Avtovaz, a government programme to boost foreign-branded car production took off in 2002, causing foreign-branded production in Russia to rocket 24 times. By the end of 2007, there were nine plants either running or planned in Russia, with total investment at more than $3.7bn. Total foreign-brand production is slated to reach about 1.46m units per year by 2010. In response to this flood, Avtovaz has taken its finger out - but only to stick it in the dyke: previous Soviet-era management under Vladimir Kadannikov mostly limited itself to upgrading existing models, laying a Western veneer over the Soviet soul. "Avtovaz basically has not produced a new model since the 1970s," says CentreInvest's Natalia Sorokina. "And if things go on like this, it's future might well be just assembling components."


Renault's revolutionary sLogan: "cheap but not crap" In the face of these changes that threaten to shunt Avtovaz's "cheap and crap" cars to the scrapheap, what does Renault think it can change? True, managerial guru Carlos Ghosn turned Nissan around spectacularly, but as he himself admits, Nissan was the complete opposite case to Avtovaz, being a company with solid engineering traditions whose costs had spiralled out of control during a domestic recession. The key to understanding Renault's interest in Avtovaz is not Nissan, but Romania's Dacia plant that Renault acquired in 1999 - and the Logan model launched there in 2004, of which 600,000 have already been sold. The new business model behind the Logan could be the lifeline Renault throws to Avtovaz. The Boston Consulting Group highlighted the Logan in a report named, "Tapping into Central and Eastern Europe's 200m Neglected Consumers." Boston calculates that 200m of the region's 350m people live on incomes above the poverty line and below median household income. Together they account for half the region's disposable income, and conscientiously by multinationals - until Renault's Logan came along. Promoted as the €5,000 car, the Logan made car buyers of income groups that producers had not previously considered potential customers. In a region characterized by low levels of car penetration, the Logan significantly dropped the market entry level, creating a new class of low-earning car owners. The secret of the Logan's success is that, in contrast to Lada cars, it's cheap, but not crap. The design has economized on electronics and soundproofing, making the ride and driving experience less comfortable, but not compromising reliability. Cutting out much of the electronics even boosts reliability and ease of servicing. The Logan is also better adapted to Eastern European roads, thanks to a high chassis, and its engine is adapted for poor quality fuel. Basically, the Logan cuts costs by cutting elements that are anyway dubious in the Eastern European context. Costs are also kept down by low-tech assembly lines that demand little initial investment. The Romanian Dacia plant hardly uses robots, as the cars are pieced together largely by hand. Wages are low, but the workers of the former obsolete state-owned giant are happy that their jobs have been saved. This strategy is tailor-made for such obsolete socialist giants: because the margin on such a cheap model is so small, and investment to be kept minimal, the strategy demands pre-existing large production capacities, a pre-existing dense dealership network, and a pre-existing established "people's car" brand. Dacia had all three of these - and Avtovaz all the more, boasting production capacity of 1m vehicles per year, a dealership chain stretching from Lvov to Vladivostok, and a brand that is folklore in Russia. So what Renault offered Avtovaz was the managerial knowledge of how to create a Russian Logan at Avtovaz - and with it a whole new class of low-income car owners. And in March 2008, the two sides agreed the appointment of four influential Renault top managers to Avtovaz: Yann Vincent, as managing director; Kristian Muller, as senior vice president and procurement manager; Hugh Demarchez, as vice president; and an unnamed financial control manager. However, Renault will not just be providing philosophy lessons, but also supplying technology for implementation. As CEO Ghosn said in an interview with business


daily Vedomosti in March: "Costs are not the main problem. Avtovaz's main problem today is the medium-term and long-term attractiveness of its production line. The plant needs a new platform, engine and transmission. This is where we are ready to help. Our main task is to support the Lada brand and help it retain its leading role in Russia." The big secret is what Lada's new budget car, planned to replace its Classic model in 2009 and the lynchpin of the strategy, is going to look like. Avtovaz CEO Boris Alyoshin let slip that it will have a Lada platform, but the power-train will probably be supplied by Renault. As such, the car will be distinguished from the Logan, of which a Moscow-based joint venture produces 70,000 a year, but have enough of Renault's engineering to constitute a new word in quality for a Lada car. Alyoshin has said the details of Avtovaz's new Renault-supported strategy will be finalized and made public in May or June. Only then will it become clear just how much influence Renault is going to exercise. Analysts were mystified as to why Renault was ready to get involved when only a blocking stake was on offer. "I just don't know why Renault bought a blocking stake that gives them so little influence," says Faritov. "Control was never an issue," explains Sorokina. "It was always clear that Avtovaz would retain control; the issue was which European partner would be chosen." The answer may be that ROE's crisis management at Avtovaz, which had taken the first long overdue steps towards controlling costs and initiated reshaping the ownership structure, was able to assure Renault of its commitment to reform. Immediately prior to the deal's announcement in December, the ROE management's political weight was upped a notch, with CEO Vladimir Artyakov being appointed governor of Samara region, and government heavyweight Boris Alyoshin, formerly head of the Federal Industry Agency, taking over himself as the new CEO at Avtovaz. This means that Avtovaz management has the authority to implement whatever strategy is decided upon - and if they buy into Renault's strategy wholeheartedly, the chances of its successful implementation are good, even if Renault only has a minority stake. However, one measure that Renault used to good effect at Dacia is unlikely to be replicated at Avtovaz - job shedding. "Avtovaz has a workforce of 104,000," says Faritov, "and produces only twice the number of cars as Toyota does with a tenth of that number." However, analysts are certain that no sweeping job cuts are on the cards. "Avtovaz basically employs all of Toliatti," says Trusts' Yakubov, "and now as a state-run company, the political costs of laying off large numbers of workers would be enormous." But there is a workaround solution that seems to be on Renault's mind, and would leave everyone happy. "Sooner or later," Ghosn told Vedomosti, "we will start using some of Avtovaz capacities for our own production."


55. GAZ Group intends to purchase VM Motori Rencap March 31, 2008 Event: On Friday (28 Mar) Vedomosti reported that the GAZ Group was negotiating the purchase of a 50% stake in Italian diesel-engine manufacturer VM Motori. GAZ made the offer to VM at the beginning of March and the negotiations are now in their initial stages. In 2007 VM Motori produced about 96,000 light diesel engines for Chrysler, Chevrolet and Maxus LCVs manufactured at GAZ's LDV plant in Birmingham. VM Motori is a JV of GM and Penske Corp. Action: The news is positive for the stock and we reiterate our BUY rating. Rationale: Currently, GAZ Group doesn't have its own production facilities to supply light diesel engines for its LCV and MCV segments. In 2007 GAZ's LCV sales increased 9.3% YoY amounting to 180,576 units; MCV sales were 12.7% up to 28,943 units. Both segments generated about 39% of the group's 2007 revenue. Most of the LCV engines are provided by Severstal-auto's engine plant ZMZ. From the beginning of 2008, Severstal-auto launched the competitive LCV Fiat Ducato and as a result GAZ is in dire need of its own 2-3l diesel engines for its LCV division. Therefore the purchase of a stake in VM Motori would allow GAZ to reduce dependence on Severstal-auto. GAZ also designs own light diesel engines.

56. Kamaz looking for strategic imvestor Deutsche Bank April 2, 2008 According to Vedomosti, KAMAZ is looking for a strategic investor and the main candidates are MAN, Volvo, Iveco and Scania. The company may sell its blocking stake by the end of 2008 based on a company value of USD5m (which is 25% above the current market price). Then, KAMAZ plans to place its shares on the market. On the one hand, KAMAZ may be attractive for a foreign investor given the growth in the trucks sector on the back of developments in the manufacturing and construction industries. Furthermore, KAMAZ's shares are currently illiquid due to the very low free float of about 3%, and placing additional shares may improve the attractiveness of the company. However, we note that this news is just the company's plan and negotiations have not even started. We also note a possible problem inasmuch as KAMAZ is involved in producing defence items. Furthermore, the government controls 38% of the company and has not decided what it is going to do with its stake. One option would be to place it under the control of Rostechnology, a government corporation. Rencap writes: 38% of the company is owned by the state; 33% is held by Kamaz Capital, and 21% has been accumulated by Troika Dialog. Despite having a very strong market for its products (heavy-duty trucks are in high demand from various segments best combined under the infrastructure theme) the company reached capacity in 2007 and used ineffective means to boost production (Kamaz reported 47% YoY growth in labour costs). We estimate this translated into a significant drop in EBITDA margin (from 10.8% in 2006 to 8.8% in 2007). Even


though the increased capex should begin to help to resolve capacity bottlenecks more efficiently in 2008, our estimated 10.3% EBITDA margin is still far below the profitability of Kamaz's peers (Man and Scania are expected to post 14% and 18% EBITDA margin respectively). This margin-improvement potential and significant share ownership by Troika (who just sold 25% stake of AvtoVaz to Renault) makes us believe that Kamaz will very likely be sold to a strategic investor.

57. Kalinigrad's Avtotor stops assembling Chery cars bne March 31, 2008 Kaliningrad's Avtotor group will stop assembling Chery cars after March 31. "Due to the American dollar's strengthening decline and the Russian ruble's appreciation, Avtotor and Chery do not consider it possible to further their cooperation, including the planned construction of a new Chery assembly plant," Avtotor said in a statement, as cited by Prime Tass. Avtotor is capable of producing 70,000 cars per year. It assembled 39,000 in 2007, including KIA, BMW, Hummer, Chevrolet, Chery models.

58. Liebherr to build 200m euro engineering plant bne March 31, 2008 Swiss engineering company Liebherr is to build a 200m euro plant for auto components, aircraft parts and earth-moving equipment in Dzerzhinsk, Nizhny Novgorod Region, Valery Shantsev, the region's governor, announced, writes Prime Tass. The plant focusing on producing auto components and aircraft parts will be built from mid-2008 through late 2009. The second stage producing earth-moving equipment will be completed in late 2011, according to Prime Tass.

59. Moscow to assemble electromobiles in 2009 bne April 4, 2008 Moscow will probably start assembling and putting into operation the first national electromobiles already in 2009, Leonid Lipsits, chief of the transport and communication department of the city's government, said at a meeting of the Moscow government, according to Kommersant. In Moscow, the present-day automobile facilities will be constructed this year to test the first electromobiles of Russia's make, Lipsits said.


60. Sibur Russian Tyres: good results, still considering combination with Amtel Rencap April 4, 2008 Event: Yesterday (3 Apr) Sibur Russian Tyres (SRT) held its first analyst meeting. During the Q&A session the company said that it is still conducting due diligence on Amtel, a potential business combination target. Among the potential synergies of such a combination SRT mentioned: 1) an immediate increase of capacity; 2) a technology transfer from Vredestein R&D and consulting centres and; 3) an approximately $110mn saving in capex out of $430mn planned for the next three years. SRT named Amtel's debt restructuring as a necessary condition to advancing negotiations. Action: We don't cover Amtel, but view the news negatively in the short term. Rationale: We believe Amtel shareholders are exposed to significant risk. Amtel's debt stood at $870mn at the end of 3Q07, or 13x our expected 2007 EBITDA of $69mn (the company projected 2007 annual sales to be $980mn, and showed 7% EBITDA margin in 1H07). Combining Amtel with SRT would improve Debt/EBITDA to 6x (in 2007 SRT earned $100mn EBITDA on $1,050mn in sales, finishing the year with about $130mn debt), but SRT clearly stated that Amtel should restructure its debt before the talks can proceed. Extremely negative market conditions don't allow for the debt to be rolled either. SRT indicated that Amtel's debt holders stand a better chance of recouping their money by agreeing to write off a part of the debt, and freezing payments on the restructured portion. In this situation, Amtel's shareholders would suffer the most: even if the company is not declared bankrupt, lenders would demand a revision of the business model in favour of larger cashflows in a shorter time periodwhile equity investors bought the shares believing in a strategy that would take longer to implement.

SECTOR Aviation and defence 61. Aeroflot sells Tupolev 134s Rencap March 31, 2008 Event: On Friday (28 Mar) Aeroflot announced the sale of its Tupolev 134 regional jets. Tu-134 has been furrowing the skies for more than 40 years but on 31 Dec 2007 the company stopped operating this type of aircraft. Nine of these planes were sold to Aeroflot subsidiaries: Aeroflot-Don, Aeroflot-Nord and Aeroflot-Plus; the company plans to sell the remaining five to external buyers. The average age of these aircrafts is 28 years and they are priced at approximately $3mn. Action: We don't cover the stock, but view the news positively. Rationale: By selling the Tupolev 134s the company loses a big part of its regional fleet. However, the step is necessary and demonstrates Aeroflot's fleet-renovation efforts. The company plans to substitute the old regional jets with the new Sukhoi Super Jets.


62. United engine corporation could be created in 2008 bne April 3, 2008 A source in the Russian Industry and Energy Ministry has told Interfax that a decision might be taken in 2008 to create a united engine corporation. "The decision made in 2008 will allow to provide locally built aircraft with locally manufactured engines by 2015," the source told journalists on Wednesday, April 2, as cited by Interfax. Such a corporation would also supply the Russian energy industry with gas turbines, the source said.

SECTOR Construction, Real Estate 63. Raven Russia Ltd receives loan from VTB Europe Plc Rencap March 31, 2008 Event: On Friday (28 Mar), Raven Russia Ltd, a UK developer of Russian warehouses, received a $170mn construction facility from VTB Europe Plc (a London-based investment unit of VTB Group) to finance the 200,000 m2 Rostov logistics project in southwest Russia. The facility comprises VTB Europe funds of $100mn to fund a 75% loan to cost for the first phase of the Rostov project, and an additional option of an uncommitted $70mn to fund a 75% loan to cost for the second phase of the project. The facility is for seven years (including the construction period) and, based on current LIBOR rates, is at an overall interest cost of below 7%. Action: We do not cover the stock but regard the news as positive for the company. Rationale: In the current credit market environment this is very positive news, which reflects the preferential position of those developers with Western parent companies. Still this interest rate is 3-4% lower than the industry average. We believe there could be unrevealed significant conditions to the loan agreement which should to be considered.

64. AFI Development: Neutral numbers, positive outlook UBS April 1, 2008 16% portfolio valuation increase vs. 1H07, an almost flat NAV:The JLL valuation of the AFID portfolio was up by 15.8% vs. 1H07 to $5.2 bn. New projects added 3% (Botanic Garden residential and Moscow City hotel); the rest was thanks to the existing projects, in particular Moscow City Shopping Center and partly Tverskaya Zastava, as well as the increase in ownership of some projects. The NAV is flat at $5.4 bn on an increase in debt. Relatively strong financial position with $812 mn in cash: '07 net cash was $480 mn. The planned '08-09 investment program is c$1-2 bn, depending on the number of


added projects. We believe about $0.8 bn will be spent in '08 and in the worst case scenario the company will be able to finance the bulk of it using its own cash, although it is trying to get external financing. Management said it is in the advanced negotiating stages of raising $350 mn from a local bank. Execution in line, new initiatives sound promising: Most projects are on track; pre-leases and residential prices are above previous JLL assumptions. On the negative side, there are delays (Pochtovaya, Berezhkovskaya, Kossinskaya-c12% of total value). Among new important developments there is the decision to consolidate all of Africa Israel's Russian and Ukrainian businesses into AFID, which we believe creates additional upside for the story. Valuation: $12.6 PT unchanged, Buy rating maintained: We keep our 12%-16% discounted SOTP DCF-based $12.6 PT for AFID's shares and Buy rating. Our 12M forward valuation of the company's portfolio of $6.4 bn is 23% above JLL's '07 number. We foresee new projects and execution, including getting the first permits for the Kuntsevo project in summer 2008 as the catalysts. The stock is trading at 0.8x 07NAV, in line with the sector average. EPS changes are irrelevant for AFID at the moment and mostly stem from a revaluation gain.

65. BRICKS & MORTAR: House hunt for Red October Graham Stack in Moscow April 1, 2008 The Red October Chocolate factory is an icon of the Soviet-era. For more than 30 years Russian children have grown up craving Alyonka chocolate bars, the factory's flagship product, and the chubby face girl on the wrapper is one of the best known faces in the country. But at the end of the 2007, the owners of the factory caved into temptation: situated on one of the most desirable locations in Moscow, they decided to close its doors and redevelop it as top-end residential apartments that are sure to sell for millions of dollars a piece. The landmark redbrick building is perched on the Bolotny Island in the middle of the river Moskva. It is a short walk from the Kremlin and overlooks the rebuilt Church of Christ the Saviour cathedral on the opposite bank. Locations in the poorly supplied heart of Russia's capital don't get better than this. With property prices soaring to astronomical levels over the last five years, the factory owners, Russian conglomerate Guta, decided to move the chocolate operations to the city's outskirts and convert buildings and grounds into a luxury residential complex where prices are rumoured to reach $32,000 per square metre (sqm). The three main redbrick buildings and the famous chimney will remain, while 30 other buildings that have accumulated on the territory over decades will be razed to make way for new developments. Internationally renowned architects are contributing to the factory conversion, where the most prestigious properties will be loft apartments created from the spacious top-floor production halls: boasting huge windows that afford a magnificent view across the river and of the Kremlin. "After such a long time in coming," says Ekaterina Thain, director of residential department at Knight Frank Moscow, a consultant to the Red October redevelopment project, "finally sales will be starting next year. There has been a lot development for the high end of the market, but


these buildings will be a chance to buy a little bit of Soviet history too. They are unique in the city." Bottomless pit Property prices have soared across all of Central and Eastern Europe in the last two years and were up by just under a quarter in Russia, one of the fastest growing markets in the region. While the Red October development makes the headlines, it's the emerging middle class that's the driving force behind a booming residential property market. "Growth in 2006 was simply astonishing," says Renaissance Capital real estate analyst Alexei Yazykov. "We're talking about more than 100% over the year in Moscow. The capital has led the market, but in the last year the regions have joined the fray and prices in all the millionki - the 11 regional cities in Russia with populations of more than a million people - are now close on the capital's heels. Prices in northwest Russia rose 76% in 2006 - St Petersburg, Russia's "other" capital, also saw prices double - and homes in the Volga Region saw their value jump 84%, according to Renaissance Capital. The leap in prices is being driven by powerful GDP growth and rapidly rising incomes. Between 2004 and 2007, Russia's GDP growth averaged 7% per year and the growth is still accelerating: the Russian economy expanded by 7.6% in 2007, although the brouhaha on international credit markets is expected to the edge of growth in 2008, which is forecast at 6.7%. At the same time, real incomes have been increasing by an average of 12% over the same period and were up by 20% over 2007, according to official preliminary estimates. Put another way: when the late former president Boris Yeltsin stepped down in 1999, most Russians were earning $50 a month; after eight years under President Vladimir Putin they are earning $500. Since 2001, they have access to credit too, meaning whole swathes of the population have crossed the threshold where they can consider buying new apartments. Counter-intuitively, the fact that 65-80% of the population already owned their own apartments, thanks to the free-of-charge privatization of the 1990s, simply fuelled the explosion in demand. "High level of home ownership has created seed capital allowing people to continuously trade up," explains Alpha Bank's real estate analyst Brady Martin. The Soviet legacy of pitifully undersized apartments means that Russia's housing stock is around 21 sqm per capita - lower than CEE peers such as Poland (23 sqm) and considerably lower than Western Europe (with an average of 36 sqm in the EU capitals). "It is hard to get your head around just how short the supply of accommodation in Russia is," says Roland Nash, head of research at Renaissance Capital. "But to increase the average living space per person in Russia to just the average enjoyed in Moldova - an economic basket case - would require the construction of the equivalent of two cities the size of Moscow." And most people don't want to buy many of the apartments that are already there. According to Jones Lang LaSalle, over two-thirds of Russia's housing stock is over 30 years old, and an astonishing 60% requires renovation - 15% is in critical condition and 12% is officially considered uninhabitable. The upshot is that although the majority of Russians own their apartments, virtually no one is happy with them, creating a powerful upward draught that is fanning the flames.


This huge pent-up demand and lack of supply has sent the real estate market spiralling upwards since about 2003, when the mortgage industry really started to take hold. Price have increased 10-fold in the last decade, but the difficulty in obtaining mortgages eventually put a ceiling on the market 2006. "Prices simply rose to a level out of reach of all but the most wealthy citizens," says Yazykov, "and so they could not go any higher." The meltdown of the US sub-prime market has also been a drag on price growth, which slowed sharply in 2007 - especially in Moscow. Many banks have been financing their mortgage programmes with international borrowing and securitizations of mortgages were just appearing. As liquidity on the international credit markets evaporated, Russian banks have been cut off from their favourite form of refinancing loans, which has put the squeeze on property prices, which plateaued in the second half of last year. Supply splutters Russia's residential property market has paused for breath, but most analysts believe the stop will be temporary; continued upside in residential real estate is supported by a severely underserved market and supply side bottlenecks. "There's definitely been a construction boom here, but even with this boom supply is far short of demand. To give you an idea of the extent to which the market is under-supplied, independent bodies such as the Institute of Urban Economics and the Institute of Urban Land Development estimate the demand for residential properties at 1.2bn sqm. This is a massive amount. At present construction rates, it would take 20 years to fulfill. In terms of just residential stock, this is five cities the size of Moscow," says Yazykov of Renaissance Capital. Paradoxically, for a country as vast as Russia, the chief bottleneck is lack of land plots, or rather of plots with sufficient infrastructure to permit development. Where there are no access roads, water or power supply, development becomes prohibitively expensive. Supply has also been restricted by recent regulatory measures. In 2005, a new housing code came into force that toughened requirements for developers to raise funds from the population. "There's been more control of residential construction, after local investors got ripped off," explains Martin. "Previously, developments were funded by presales, even before development even started, and sometime even before obtaining planning permission. Now the new law says you have to start construction before you can start presales." However, the tightening of regulations benefits overall transparency and public confidence in the sector. The consolidation it stimulated in the sector also benefits foreign investors looking for respectable and stable partners to develop with or to invest in. A second regulatory issue is currently deterring foreign investors from the massive Moscow real estate market: the total absence of freehold in Moscow. The city owns the land and makes it available only on long-term lease. This gives city hall enormous bargaining power, which it uses to claim the "the city share" of any development: developers must either transfer apartments to the city for social needs, or build infrastructure for free.


While it remains difficult for international developers to make headway in Russia, Russian developers have internationalized in a big way latterly and raised capital with a slew of IPOs in 2007. "Many companies own development rights," explains Alfa's Brady, "but still have no core portfolio yielding properties, so they cannot raise debt. That's why they are so enthusiastic about equity." Russian real estate companies raised $8bn over 2006-2007, exploding from two or three traded companies to 15, including the CIS countries. Most of these companies trade on the London Stock Exchange's Alternative Investment Market with mixed results. Another round of real estate IPOs is on the cards for 2008, predicts Brady. Following the US' sub-prime debacle, other channels of raising finance have closed. Debt for development appeared in 2006 and financing in euros was becoming available at single-digit rates, with amortization terms for 10-20 years. Now rates are back at 14-15% and the maximum loan-to-value available has dropped to 60%. Moscow is the new London "Luxury doesn't care about anything. You know, they say many non-domiciles in London are currently looking for another location, because it is so expensive. The exception are the Russians, who are simply happy to live in a city less expensive than Moscow," laughs Yazykov. While it is an exaggeration to say Moscow is more expensive than London, Knight Frank calculates the super-prime property price growth in Moscow in 2007 reached 40.9% and is set to reach London levels within 10 years. "This will continue," says Knight Frank's Thain. "The real centre is very restricted in Moscow, and construction is getting smaller and smaller from year to year. There are no more Red Octobers out there. There is no doubt top end is soon going to be close to London prices." The recent Wealth Report published by Knight Frank and Citibank Private states baldly: "We forecast that within 10 years, Moscow will vie with London for the most expensive city in the world. While the prime area of the city will be much smaller, the prices achievable for new build prime developments will be comparable. There is huge demand for prime property in Moscow owing to little existing stock and a very small potential pipeline of additional prime property." In fact, the London and Moscow markets are already increasingly intertwined. "We have really, really strong connections with our London office," explains Thain. "Russians are buying a lot of properties in London. In fact, we do not just sell luxury apartments and luxury housing in and around Moscow; we are famous here for also selling apartments and houses in London to Muscovites. Wealthy Russians want firstly an apartment in the centre of Moscow, where their business is; secondly a country house; and then their third location will be in London for sure. Their fourth and fifth locations are summer houses in Italy or France." Global real estate players have come in droves to Moscow over the last few years to cater to this burgeoning business. In 2006, Morgan Stanley real estate investment fund made their first investments in Russia, snapping up a 15% stake in RGI International, a developer of elite residential in Moscow, and a 10% stake in Moscow's R.E.D, developing mostly commercial and some elite residential. In March


2007, Morgan Stanley took a 25% stake in St Petersburg-based RBI Holdings. Deutsche Bank's real state investment arm RREEF is also involved in prime residential development, and a slew of other funds are following in their wake. Cushman and Wakefield Residential has been present in Moscow since mid-2006, and is now starting to reap the rewards of the decision. "What we do is arrange investment deals, sometimes we are representing landowners, sometimes investors who want us to find something for them. It's mostly foreign investors interested in new developments and redevelopments. Most investors we work with are international real estate funds," Christer Lystad, head of Cushman and Wakefield Residential in Moscow, explains. "Most of these are joint ventures with Russian companies doing the development and international investors contributing the finance, with plans and designs done jointly." Lystad says projects currently bring a return on investment of over 50%, and earn yields of 7-10%. The biggest deal Lystad stitched together to date has been a luxury residential development based on the Otrada Equestrian Club in Moscow. Lystad persuaded Orco Group's Endurance Residential Subfund to invest $200m in the development. Otrada Equestrian Club is home to some of the country's pre-eminent polo events such as the Rolex Polo Cup, the Moscow Polo Cup and the Russian Polo Cup. The sporting theme is one dear to Lystad's heart - he has himself been a professional sportsman in both his native Norway and in Moscow, where he played the outdoors form of ice hockey called bandy. Lystad says a number of similar elite residential complexes are in the pipeline for 2008 - and, not coincidentally, they mostly come equipped with top grade leisure and sports facilities such as fitness studios. Cushman and Wakefield also facilitated the development of the Mayak yacht club in its picturesque riverside surroundings on the outskirts of Moscow.

66. LSR signs contract on cement plant Deutsche Bank April 4, 2008 According to a press release, LSR has signed a contract with Cement Northwest (100% owned by Hefei Research, China) to construct its cement plant in Slantsy (Leningrad region). The contract is worth about Euro163m (about USD250m) and is to be funded through LSR's IPO proceeds and borrowings. The company is also in talks over equipment to be supplied for the cement plant (worth Euro126m, or USD197m). We remind investors that LSR is in the process of constructing a cement plant (scheduled for completion by 2010) that will help to make the company fully vertically integrated. The cement is to be used internally to develop the company's business. The cement plant has a total planned capacity of 1.85m tonnes, with the investment estimated at about USD600m. We also note that the Key developments after the IPO have come fully in line with the company's IPO promises. Building materials Construction of a new brick plant began in March 2008 Acquisition of a leading DSK and building materials business in Yekaterinburg Acquisition of a leading aerated concrete business in Kiev region


(70% market share) Development Acquisition of 50 hectares in Yekaterinburg We are reiterating our Buy recommendation with a 12-month target price of USD19.50.

SECTOR Engineering 68. Power Machines: FY07 RAS financials and production update Rencap April 2, 2008 Event: Power Machines yesterday (1 Apr) released key FY07 RAS figures. Revenues grew 22% YoY to $694mn, while net loss reached $122mn (net loss of $37.3mn in 2006). Power Machines' loan portfolio declined to $150mn. The company's volume of production increased 50% YoY. During 2007, the company produced turbine equipment with a total capacity of 4.5GW and generator equipment with a total capacity of 3.5GW. Power Machines' order book increased 53% YoY, reaching around $2.6bn as of the end of 2007 with the share of domestic contracts at 60%. The company said that the domestic market will be its priority in terms of new orders. Action: The news is neutral-to-negative for the company. We reiterate our HOLD rating. Rationale: In general, the figures are in line with our expectations. However, the reported net loss is quite high, although the company's IAS net loss figure may be smaller, in our view. In 2008 we expect Power Machines' financials to improve. The company provided guidance indicating that production would be increased, with the total capacity production of turbine equipment reaching 6.7GW (up 49% YoY), while that of generator equipment increasing to 5.8GW (up 66% YoY). Power Machines also said it had escalated contract prices, brought administrative expenses down and decreased the cost of production. In our view, Power Machines is interesting in the long-term and it will play the significant role in the moderisation of Russian utilities.

69. Kopeisk Machine Building Plant: New owner and buy-back offer Rencap April 4, 2008 Event: Kopeisk Machine Building Plant (COMZ) has announced a new controlling shareholder, Mining Machines of Urals (Gorniye Machiny Urala, MMU), with a stake of 94.12% common shares. COMZ is a leading Russian producer of mining and heading equipment for the potash and coal industries, and road- and bridge-building machinery. The beneficaries behind MMU have not been disclosed, but we think they are affiliated with Silvinit. MMU made a buy-back offer to minorities, who may sell their shares at RUB222.76 ($9.41 at yesterday's CBR fixing). The offer is valid for 72 days, from 3 Apr. Action: We regard the news as rather negative for the stock. Rationale: The buy-back price offers little upside potential from yesterday's ask price of $9.40/share. In our view, the offer price is quite low: at $9.41/share, our 2008E multiples are P/E 6.5x and EV/EBITDA 2.3x. COMZ's sales grew 30% YoY in Jan-Feb 2008, above our expectations, which may mean even lower multiples for 2008. In


the longer term, we think the company will benefit from strong demand from its customers (primarily potash and coal miners) and continuing product mix diversification. We are positive on this producer, but note the significant risk of squeeze-out, which is very likely to begin when MMU accumulates a 95%-plus stake.

SECTOR Media and IT 70. RBC signs enhanced coverage agreement for RBC TV Rencap April 4, 2008 Event: RBC has signed an agreement with Comcor TV, the owner of digital-cable operator AKADO, to make RBC TV available via all its basic packages. AKADO's audience in Moscow, Zelenograd and Lyubertsy exceeds 800,000 households. Action: We reiterate our SELL rating and $7.70 target price. Rationale: In 2008 RBC TV's strategy is to increase its penetration of Moscow and other major Russian cities. At the end of 2007, penetration in Moscow was over 50% vs a target of 85% by the end 2008. RBC has recently signed an agreement with Mostelecom which will be the main driver of increased penetration, though this agreement with AKADO will also help. Increased penetration is important because more complete coverage of Moscow will allow RBC to raise its prices substantially. However, in our view the more immediate issue for RBC TV (21% of RBC's 2007 revenue) is its exposure to financial-services advertisers. For RBC as a whole, financial-services advertisers account for around 20-25% of revenue, but for RBC TV the figure is in excess of 50%. RBC TV's business model is advertising funded, which makes it vulnerable to a protracted slowdown in capital-market conditions. The need to invest in local content could raise downside risk to company guidance and to a lesser extent, our forecasts. On our estimates RBC is currently trading on 54.1x and 32.7x 2008E and 2009E earnings.

71. RBC acquires television station in Novosibirsk Rencap April 3, 2008 Event: RBC has announced the acquisition of the Molodaya Kultura Sibiri television and radio broadcasting company based in Novosibirsk and has now commenced terrestrial broadcasting. The value of the transaction is about $7.7mn. Action: We reiterate our SELL rating and $7.70 target price. Rationale: RBC has previously said that it would use part of the proceeds from last year's $180mn right issue to expand RBC TV's geographical footprint. This transaction gives RBC 90% coverage of Novosibirsk, whereas previously the channel had been available to cable subscribers only. Though this transaction is in line with the company's strategy, we are sceptical that the incremental revenue gain from expansion outside Moscow and St Petersburg will outweigh the required investment. To broaden the channel's appeal in areas like Novosibirsk, RBC plans to invest in more regional programming, however this is unlikely to be particularly attractive to mass-market advertisers. On our forecasts, which are below the company's guidance, RBC is trading on 54.1x and 32.7x 2008 and 2009 estimated earnings, with the risk-reward balance on the downside in our view.


73. Rambler Media spin off Deutsche Bank April 2, 2008 Rambler Media announced yesterday that it had sold a 51% stake in its media selling house, Index 20, to IMHO VI, a subsidiary of Video International Group. The remaining 49% belongs to Rambler Media. Neither the price nor any other details of the transaction were disclosed. Index 20 sells advertising on Rambler's internet resources. Starting from January 2008, all banner ads on Rambler have been sold by IMHO VI, and we view the sale of the stake in Index 20 to VI as a logical step for Rambler. Rambler expects Index 20 and IMHO VI to generate a minimum of USD40m from Rambler display ads in 2008. Rencap writes: Rambler already has a sales agreement with Video International, whereby VI sells advertising for Rambler with guaranteed sales of $40mn in 2008, $60mn in 2009 and $90mn in 2010. This agreement makes sense to us, as VI can offer advertising on Rambler as part of a bundled media package, making it more attractive to larger advertisers. However, the decision to give up management/ownership control of Index 20 seems less obvious. Rambler expect the sale to lower its cost structure and although this is both positive and reasonable, it is not really evidence of an underlying improvement in the profitability of the business. More importantly, in the mid-term, Rambler's interests could differ from those of VI, although this to some extent is mitigated because Rambler has a three-year call option. That said, this does not detract from the restructuring story that is currently underway at Rambler, and where we remain cautiously optimistic. Rambler is currently trading on 44x and 29x 2008E and 2009E earnings, respectively, and offers the most attractive valuation/growth trajectory in the sector.

GOVT REFORMS, REGULATIONS, ECONOMICS, REGIONS 74. EU sounds optimistic note on partnership talks bne March 31, 2008 EU officials announced Friday, March 28, that the European Union could relaunch negotiations on a new strategic partnership with Russia at a June summit in Khanty-Mansiisk in Western Siberia, home to Russia's oil and gas that will be at the heart of the talks. Officials are hoping that the election of Dmitry Medvedev could put fresh impetus into talks, according to the wires. EU president Slovenia said the EU's 27 states could agree on a mandate next month for talks with Moscow on a broad agreement to cover trade, energy and human rights, after Lithuania signaled that it could drop its objections. "I am satisfied with talks today. We are moving in the right direction," Lithuanian Foreign Minister Petras Vaitiekunas said, as cited by Reuters.


Lithuania has recently taken over from Poland as the main stumbling block to EU negotiations with Russia, after Poland resolved a dispute with Moscow over meat imports, writes Reuters. Lithuania will only agree to the negotiations if Moscow fixes a pipeline to supply a Lithuanian refinery with crude oil. The Russian oil pipeline has suffered a rupture near the Belarus-Ukraine border and is out of use, according to AP. Before the meeting, France's foreign minister Bernard Kouchner and Britain's foreign minister David Miliband sent a joint letter to the Slovenian presidency arguing that now was the time to put EU-Russia relations on a new footing. "But we should be clear that the actual negotiations could be tough and drawn out," they said in the letter. "Experience shows that Russia respects the EU when we are able to adopt united positions, and act accordingly. Conversely, Russia is adept at exploiting disunity among EU member states," the letter continued, according to Reuters. The new agreement would replace the original agreement dating back to 1997. The EU especially wants a new cooperation agreement with Moscow to redefine Russian energy cooperation with Europe. EU external relations commissioner Benita Ferrero-Waldner said the question of energy security would be included in the EU's negotiating mandate for the talks. All 27 EU member countries must agree to the mandate. "I hope we'll find a wording that is sufficiently acceptable to everybody," she said optimistically. Today, the EU imports 50 percent of its energy needs, a level that will rise to 70 percent over the next 20-30 years, according to EU forecasts.

75. Vuyugin says Russia's economic growth model unsustainable bne April 3, 2008 Chairman of the board of MDM Bank, and former head of the Federal Financial Markets Service, Oleg Vyugin, said April 2 that Russia's current model of economic growth is unsustainable in the long run. He said high economic growth should not take precedent over stability. "The model of economic growth that has formed in Russia is attractive on the one hand, but unstable in the long-term," Vyugin told the Modernization of the Economy and Globalization conference organized by the High School of Economics, as cited by Interfax According to Vyugin, the Russian economic model is characterisedby the following factors: the huge mass of public savings through putting aside oil and gas money, the pegging of the ruble exchange rate to two currencies, despite the balance of payments imbalance, negative real interest rates and high nominal interest rates


under a fixed ruble exchange rate, which lead to high capital inflow. As a result of the combination of these factors, the public does not save, and high consumption levels together with powerful capital inflow cause inflation. Indexation of wages and increasing costs then cause competitiveness to fall. Vyugin proposed switching to a floating exchange rate and control by the Central Bank over interest rates. He also proposed changing the tax system to stimulate savings and investments, for instance by returning investment tax concessions in the profit tax, according to Interfax.

76. Kudrin comments on raising energy tariffs in Russia Deutsche Bank April 1, 2008 Deputy Prime Minister Alexei Kudrin spoke about tariff regulations in Russia during the Federal Tariff Service meeting yesterday. We find the remarks from the meeting quite reassuring for the utilities sector and for the sector liberalisation in general. "Certainly, in the next two or three years we shall have to go for higher tariff growth to address the issue of tariff disproportion," Kudrin was reported as saying by Interfax. One of the major concerns voiced by those observing the liberalisation of the electricity market in Russia is that a very substantial increase in power prices is implied in the next few years. Indeed, we forecast that power prices will more than double as a result of the gas prices being hiked coupled with the capacity and electricity markets being opened up to competition. With the CPI inflation in double digits, the argument goes that the government will be reluctant to raise power prices. Meanwhile, Sergey Novikov, head of the FTS, stated that next year the average power price may rise by 20-23% for end-users. We see this as further indirect confirmation of the government's resolve to go ahead with the reform.

77. Ministry of Finance submits new oil and gas tax proposals Rencap April 1, 2008 Event: Interfax reported yesterday (31 Mar) that the Ministry of Finance has submitted a new tax proposal to the government. The ministry proposed the introduction of a differentiated excise tax for fuels and the reduction of excise rates for high-quality environmentally friendly gasoline. They also suggested indexing excise rates to inflation starting from 2011; introducing mineral-extraction tax (MET) breaks (full or partial MET exemption) for Russian offshore oil fields in 2010-2011; cancelling zero MET rates for associated petroleum-gas production (as opposed to introducing fines for excess gas flaring); reducing MET for oil producers by around 10% by increasing the threshold from $9/bbl to $15/bbl; and keeping MET flat for gas producers until 2011. Action: If adopted, the tax initiatives would be positive for oil and gas producers, especially Rosneft, LUKOIL and Gazprom Neft. Rationale: These tax initiatives have been widely discussed in the past week and should not come as a surprise. The primary beneficiaries of a differentiated excise tax should be the most refining leveraged, LUKOIL and Rosneft. Meanwhile, Rosneft has been lobbying for/against a differentiated product-export duty that was not included in the proposal, although it is still likely to be adopted, in our view. The


beneficiaries of tax breaks on offshore fields should be Rosneft and Gazprom Neft's JV with LUKOIL as only state companies will be allowed to develop offshore fields. The impact should be marginal at this point, given minimal offshore oil production. MET reduction for the existing fields, if adopted, will increase the value of the Russian oil stocks 10-15%, on average, we estimate.

78. Federal Tariff Service discusses medium-term tariff increases Deutsche Bank April 1, 2008 Yesterday, the Federal Tariff Service discussed the regulated tariff increases for 2009-10. The existing plan assumes a significant increase in gas prices (by 27.7% in each of 2009 and 2010) and the maximum level for tariff increases on gas will not be revised while the tariff on electricity may be raised by 20-23% in 2009 (compared with the 15-16% initial plan). At the same time, railway tariffs may be raised as soon as 1 July 2008, due to the higher inflation forecast. Finance Minister Alexei Kudrin believes that higher electricity tariff growth is needed to remove the tariff disparities between different groups of customers. Although this will add to inflation, he believes that the input of monetary factors is more important at this stage. One of the monetary factors which he mentioned is the high growth of wages, which is not connected to productivity growth. We note that in our view, high tariff growth is one of the important factors contributing to the high inflation growth this year. The government is set to discuss the maximum tariff increase for 2009-10 in April. Rencap writes: Transition to RAB-based regulation has been widely expected and is in line with internationally accepted standards and practices. Although the exact principles for the RAB calculation have not been disclosed, our own estimates suggest that under the current regulatory regime, only Transneft enjoys above 10% returns on the invested capital (13% in terms of 2007E pre-tax ROIC vs 9% for Gazprom's transportation business and about 6% for gas distributors). We expect the returns in the regulated industries to level off at approximately 10% in the mid term, which suggests a significant tariff growth for both Gazprom's transportation subsidiaries and oblgazes. As far as Transneft is concerned, although we expect a gradual reduction of its pre-tax ROIC to 9% by 2011, its market valuation should also benefit from a more transparent regulatory system, in our view.

79. Bills on strategic sectors and telecommunications Deutsche Bank April 3, 2008 This morning, Vedomosti has provided further details about the new bill on foreign investment in strategic sectors and the draft amendments to the Law on Telecommunications passed by the Duma (the lower house of the Russian parliament) yesterday at the third reading (following which, it must be approved by the Federation Council and the President).


As we wrote in our New regulations: on balance, positive for wireless published on 25 March 2008, there are two important changes: first, the wireless industry is classified as 'strategic' and second, the notion of a 'dominant' mobile operator (with a 25% market share threshold) has been introduced. However according to the newspaper, during the third reading this notion has been amended: now it is to be used in the context of the Law on foreign investments into Russian strategic entities. The two main implications are: Any foreign investor seeking to buy more than 50% in a dominant Russian mobile operator (we believe that these are MTS, Vimpelcom and Megafon) needs approval from Russian authorities (if the foreign state is a stakeholder in the buying company, approval will be needed for a stake of 25% or more). The 'dominant' operator concept now does not imply tougher anti-monopoly control for the Big 3, as the notion of a 'dominant' mobile operator will not be applicable under the law on competition. We believe that the draft laws reinforce our investment case for MTS and Vimpelcom centred on Russian ARPU growth on the back of usage growth and relative pricing stability as the high barrier for foreign entries is unlikely to encourage more competition. UralSib writes: MTS, VimpelCom: State Duma eases concerns over possible price controls The final version of the amendment indicates that a telecom operator defined as a dominant market player would not be subject to price controls, as may have been the case under the previous version of the amendment. As a result, the introduction of the new legislation (which now needs approval from the Federation Council and president) should not affect the operations of either MTS (MBT - Buy) or VimpelCom (VIP - Hold). ... but foreign buyers of large stakes in companies would need government approval. (...) As a result, any foreign investor seeking to increase its holding in a dominant player to above 50% (25% in case of a state-owned foreign investor) will need approval from the Russian government. Positive for the stocks. The news is positive for MTS and VimpelCom as it should ease market concerns over potential price controls (albeit we never believed price controls were a likely outcome given that Russian mobile tariffs are already at low levels). We see no risks for the operators' share price performance from the restrictions on foreign investment, as the restrictions could only apply to strategic investments, not portfolio. Rencap writes: We believe the adoption of this bill is mainly aimed at increasing the government's influence in major sectors of the economy, including mass-media (however the Internet sector is excluded from the list). We have a negative view of the bill because we think it might create additional bureaucracy barriers for foreign investment deals and may slow growth in these industries.


80. Putin calls on Shoigu to drop fire checks on small business bne April 1, 2008 Russian President Vladimir Putin has called on the Minister of Emergency Situations to cut the number of regulations and fire security checks at small and mid-sized enterprises. "I ask you to get involved in the work, so that to lower the burden on business, given that the required rules, including fire safety rules, are followed," Putin told Shoigu, according to Interfax. Shoigu said a bill on the technical fire safety order will be passed in April. "Today, there exist 120,000 obligatory norms in the fire safety area, which small and mid-sized business, any enterprises must fulfill. There will be 1,200 norms, 100 times lower, under a new law," Shoigu said, as cited by Interfax.

UKRAINE INVESTMENT 81. 14 Companies Interested in OPP Millennium April 2, 2008 Through 31 March, 14 companies have requested bidding documents from the State Property Fund (SPF) to take part in the Odesa Portside Plant (OPP) privatization. OPP is the second largest nitrogen fertilizer producer in Ukraine. The SPF did not specify the companies that inquired after the bidding documents. The OPP privatization was originally scheduled on 6 May but on 24 March the SPF announced that it would stop the privatization of OPP based on the concerns of the Anti-Monopoly Committee. The fact that 14 companies are interested in the OPP privatization indicates the huge interest in the plant. Last year nine companies, mostly Ukrainian and Russian and only one Western, were interested in the OPP privatization. We expect therefore that this year more Western and Asian companies are interested in the privatization of the plant.

82. Pricing for the Ukrtelecom sale due RenCap April 3, 2008 The committee in charge of the sale of the 67.79% state stake in Ukrtelecom could announce the minimum biding price for the stake in the upcoming days, according to the deputy head of the state property fund, Alexander Potimkov. The deputy mentioned a likely price range between UAH12-15bn, implying a price of $0.18-0.23 per share. Action: We reiterate our HOLD rating for the stock. Rationale: The pricing could be short-term market-moving news should it come significantly above the current market price. We have said previously that we expect the sale price to be below $0.21 per share (the market price in February). Meanwhile the stock corrected towards our $0.18 target price which we view as a potentially


attractive level from a bidder's point of view. More important for the stock is the quality of the tender process and whether the Ukrainian government will be able to attract a good number of high-quality bidders from Europe and Russia. The combination of a not obviously cheap stock in a robust market with decent competition provides for relative uncertainty over the future share-price performance. We do see potential upside under the blue-sky scenario, however this will materialise under the condition that the government finds a buyer who will be able to quickly finance and execute broadband and mobile rollout. At the same time we believe the company needs aggressive restructuring. This will be a difficult task requiring support from the regulator and potentially a lower selling price, resulting in our cautious stock rating. Tibor Bokor bne comment: Peter Keller of Millennium Capital, wrote: "We see this valuation as realistic but at the lower range of a fair valuation. On 24 March the SPF called for the suspension of the privatization of UTEL and several other enterprises. This announcement has to be seen as Mr. Potymkov's personal view and not as the SPF's official view and does not mean that the privatization is continuing. We explain this with the fact that Mr. Potymkov is allied with Prime Minister Yuliya Tymoshenko (that wants to go forward with the UTEL privatization) while the Chairman of the SPF is allied with President Victor Yushchenko (who, in our view, is currently blocking the UTEL privatization)."

83. Ukraine: More progress on electricity privatisation combined reports April 3, 2008 Geoffrey Smith of Renaissance Capital wrote in a note to investors: The government yesterday (2 Apr) published preliminary dates in May for the sale of minority stakes in six electricity distribution companies. Vedimisti Privatizatsiy said open auctions would take place for the stakes between May 14 and 29, with Poltavaoblenergo being the first to be auctioned. We think all are likely to be sold as single lots. The starting price for all the stakes has been set at the weighted average share price over the six-month period to the day, three days before the respective auction. As such, the government could expect at least $600mn in total from the six auctions. We still think the quality of the privatisation process - and its impact on the government's reputation - is at least as important for the investment climate in Ukraine as the distcos' contribution to balancing the budget. In this respect, we are encouraged to see open auctions and a market-based setting of the reserve price, both of which promise a transparent and orderly sale. To make the positive effect complete, we would still need to see legal procedure strictly observed, and competitive bidding. At this moment, both are possible, even if neither is guaranteed. Separately, the government also said it would prepare documentation for the sale of controlling stakes of 60%+1 share in four generation companies - Centerenergo (CEEN), Dniproenergo (DNEN), Zakhidenergo (ZAEN) and Donbasenergo (DOEN).


Overall, the news is welcome evidence of the overall ability of the government to govern, after three months of tough political haggling. Ihor Naumets of Foyil Securities wrote: Government planning to sell four GenCos by October - The government has announced its intention to sell 60%+1shares in four electricity generating companies by October 31, 2008 at latest. The privatization will be held at open auctions. The remaining state stakes (DNEN's 16.04%, ZAEN's 10.01%, DOEN's 25.77%, CEEN's 18.29%) are planned to be sold on the stock market after October, although no schedule was announced. The government also announced that debt redemption of GenCos and equipment upgrades to meet the standards of the European Union will be among the 10-year scheduled privatization obligations. Another obligation will be restriction of ROE at a rate no more than 15%-17% (Source: Interfax). Our view: The privatization of GenCos would be positive for them, as the investment programs of equipment modernization should be accelerated and private owners should be more efficient in increasing the companies' profit margins. However, the privatization of all four GenCos this year looks doubtful. The conflict at Dniproenergo concerning its ownership structure is not resolved. Dniproenergo's management, which is affiliated with the powerful SCM Group, claims the government owns less than 60% in the company. The State Property Fund might be another obstacle for GenCo privatization, as the privatization has to be announced by the SPF and its head, Mrs. Semenyuk, has been in regular conflict with the Tymoshenko government and might hinder any attempt to privatize Ukraine's GenCos.

84. Crude Steel Output Grew 3.7% in Ukraine in 1Q2008 Millennium April 4, 2008 According to ugmk.info, thirteen Ukrainian steelmakers increased crude steel output to a total of 10.83mn tonnes(+3.7% y/y) in 1Q2008. Over the period pig iron output grew to 9.03 (+4.4% y/y) while rolled steel production reached 10.18mn tonnes to (+6.0% y/y). The highest crude steel growth in y/y terms was posted by Alchevsk Steelworks < ALMK UZ USD0.95 Hold > (+30.8% y/y) and EMZ Group (Metalen, Yenakievskiy Steelworks) (+17.9% y/y). ALMK also significantly increased steel output compared to 4Q2007 (+22.2%q/q) while EMZ Group decreased it 4.1%q/q. Mariupil Illich Plant < MMKI UZ USD1.17 Hold > insignificantly increased production (+0.1% y/y and 0.7%q/q). Kryvorizhstal < KSTL UZ USD3.65 Hold > and Azovstal < AZST UZ USD0.97 Accumulate >decreased output in quarterly terms by 1.5% and 8% respectively.

85. DUPD invests $16.2m in property acquisition Dragon April 2, 2008 Dragon-Ukrainian Properties and Development (DUPD), Ukraine's largest AIM-listed real estate fund, has announced investment into acquisition and development of a large property in Kyiv's densely populated Obolon district for $16.2m. (Company)


DUPD has acquired through its subsidiary a 96.6% stake in consumer services company Budynok Pobutu Obolon. The latter owns a 9,600 m2 administrative building located on a 1.07 ha land plot in the very center of Obolon, a large residential district in northern Kyiv with estimated population of 300,000 people. The property, close to a metro station and a high-end residential area, is expected to be re-developed into a mixed-use center. DUPD has started negotiations with local and international developers, estimating development time for the project at up to 4 years. We maintain our positive view on the company and reiterate our price target and recommendation on the stock.

86. Stakhaniv Carriage to double its share capital in July Foyil April 4, 2008 According to the Company, Stakhaniv plans to double the amount of shares and issue 37.7m new shares at a par value of UAH 1.05. Current shareholders will have the preemptive right to buy the shares in July 8 to July 29. At the Company's AGM on May 19 shareholders should decide the issue. Our view: In 2007, Stakhaniv raised its share capital twice, by UAH 12m and UAH 26m. The funds were spent on extension of capacity, modernization and design of new freight cars and metalware. With UAH 39.6m of future emission money, the total amount of equity capital raised within the last 12 months comes to UAH 78m (USD 16m). Right after the previous share emission the stock price adjusted to the level, which was 38% higher than the arithmetically adjusted price. We reiterate our forecast of that Stakhaniv's net sales growth by 37% CAGR in 2007-2011 and of net profit by 54% CAGR. We reiterate our BUY recommendation for the stock (mid-price: UAH 44).

87. Metinvest Holding to spend over $100 mln on seaports in 2008-10 March 31, 2008 Metinvest Holding-controlled Avlita Stevedore Company has developed a $100 mln investment program to be implemented in 2008310, Interfax Ukraine reports. The program includes cleaning and deepening Sevastopol's port, which will allow the company to accept Cape3size vessels. The company also plans to build a state3of3the3art seaport complex capable of processing bulk cargos, which in the words of one company representatives will allow the substantial expansion of the range of cargo types that it can process. The development of the company's port capacity will improve Metinvest Holding's ability to increase the volume of imported and exported raw materials and help it minimize its shipping and transportation costs. For Azovstal and Enakievo Steel, the successful implementation of this investment program will mean increased efficiency in transporting imported coking coal, the consumption of which by these steelmakers is likely to increase in the next three to four years.


88. Komsomolets Donbassa to reinvest 2007 NI Dragon March 31, 2008 The AGM of Komsomolets Donbassa held on March 28 voted to reinvest the company's 2007 net profit. (Company) Private energy holding DTEK, Komsomolets' principal shareholder, intends to invest $42m in the company in 2008 and $218m by 2012 to upgrade existing production capacities, install new mining equipment and decrease ash content in coal to 31% (from 33.1% currently). DTEK plans to increase coal output at Komsomolets Donbassa in 2008 by 5% y-o-y, to 3.6 Mt, which we find rather pessimistic and maintain our earlier production growth forecast of 10% y-o-y, to 3.8 Mt. As we wrote earlier, the government plans to increase domestic thermal coal prices to $90/t in May (from $66/t in 2H07). We believe Komsomolets Donbassa stands to benefit from the current market conditions given a strong market for thermal coal in Ukraine, supported by healthy demand from GenCos Vostokenergo [Not Traded] and Dniproenergo [Buy; PT $543.7], the mine's major customers. We maintain our positive view on Komsomolets Donbassa and reiterate our Buy recommendation.

89. Kryukovsky Railcar announces 2008-2016 capex programme RenCap April 4, 2008 Event: Kryukovsky Railcar, Ukraine's only wagon builder, producing passenger and freight stock, has announced its plan to invest $12.1mn in modernisation and capacity expansion by 2017. In 2008, it plans to invest $6.5mn in the construction of additional production lines for passenger and subway railcars. In the meantime, no additional details of this capacity-expansion project have been given. The company will also allocate $2.7mn to energy-saving technologies aimed at the gradual reduction of production energy intensity. The company hasn't given any guidance on its source of funding for its investment programme. Its latest reported 9M07 financials shows that as of 30 Sep the company operated unleveraged and had a $12.5mn cash balance. Action: We do not cover the stock at the moment but view this announcement as positive for the company. Rationale: At present, Kryukovsky Railcar has an annual capacity for 200 passenger railcars and 8,000 freight wagons. Although passenger wagons accounted for only 1% of KVBZ's total FY07 output, the company's management regards this segment as the priority area for investments in the mid term. In 2008, KVBZ will focus on increasing its share of passenger wagons in total output (plans a 297% YoY production growth to 135 vehicles) and decreasing the manufacture of freight stock 8% to 6,850 wagons. The targeted decline in production is due to a growing shortage of freight-wagon assemblies in Ukraine. In 2008, KVBZ plans to produce 112 passenger railcars for Ukrzaliznytsya and 10 subway railcars for the Kiev subway. In addition, it will supply component parts and wagon bodies to Gostomel Car-Repair plant (Belarus) for further assembling of 20 passenger railcars.


90. Kyivstar to roam in Utel's 3G network RenCap April 4, 2008 Event: According to Vitali Vorozhbit, director for new services at Kyivstar, who was cited in Kommersant yesterday (3 Apr), starting in May, the company will offer its clients wireless high-speed internet access using Utel's (a Ukrtelecom subsidiary) existing 3G network. Kyivstar will sign the agreement with Utel in the next few days. Action: Potentially positive for the Ukrainian telecoms market, in our view. Rationale: We view cooperation between Kyivstar, the largest mobile operator, and Utel, the newcomer on the market, as positive. To date the Ukrainian mobile market has been characterised by fierce competition which has exhausted mobile operators' budgets and driven prices lower. The newcomer Utel is the only operator with a 3G licence in Ukraine and we believe it is very encouraging that it is willing to share the network with its competitors. The cooperation will save costs and enhance revenues for both operators. However the chance of a substantial improvement to their P&L is low at this stage, being dependant on the actual demand for the service. We believe that this agreement could prompt remaining mobile operators MTS, Vimpelcom and Astelit to enter similar agreements with Utel, which would be beneficial for the whole telecom market in Ukraine.

91. PIK Group to enter St Petersburg, Ukrainian markets bne April 1, 2008 Russian developer PIK Group says it will open the markets of St Petersburg and Ukraine, the company said last week. PIK has already set up new business units in these regions: PIK Northwest in St. Petersburg and PIK-Ukraine in Kyiv. The company is also looking at expanding into the Russian regions. Most of its projects are currency located in Moscow.

92. LSR Group: Expanding building materials business into Ukraine UralSib March 30, 2008 Acquisition of major aerated concrete producer ... LSR Group (LSRG LI - Buy) announced on Friday that the Ukrainian Antimonopoly Committee granted its subsidiary, Aeroc International permission to acquire a 97% stake in Obukhiv Porous Concrete Plant (OPCP), a major Ukrainian aerated concrete producer. The purchase costing Euro30 mln ($47.3 mln) is expected to be complete in the summer. According to the Ukrainian Union of Building Materials and Product Manufacturers, OPCP has 18% of the Ukrainian aerated concrete market and over 50% of the Kiev market. Although financial details have not been released, we view the deal as positive for LSR, as the company continues to acquire capacity in its Ukrainian operations, which will support future real estate projects in the region.


... to double Ukraine business. The acquisition would almost double LSR's Ukrainian aerated concrete production from 400,000 to over 700,000 cu m per year. We estimate the deal would boost LSR's building materials and aggregates revenue by 2.1% to $1.14 bln in 2008 and by 3.9% to $1.51 bln in 2009. The acquisition would increase EBITDA by 1.4% to $540 mln in 2008 and 2.3% to $790 mln in 2009. The Ukrainian market has displayed strong construction growth over the past 3 years, and this looks set to continue. Demand for housing is driving the building material sector - for example, residential real estate prices jumped 19% on average in 2007 to reach $3,170 per sq m by year-end. Positive for LSR and favorable for share price performance. LSR's expansion in Ukraine will almost double its production capacity in the building materials segment of the market and, consequently, boost sales volumes. Aeroc International AS is an aerated concrete subsidiary of LSR Group with operations in 5 countries in Northeast Europe: Russia, Estonia, Latvia, Lithuania and Ukraine. In 2007, we expect Aeroc International AS to post aerated concrete sales of $63 mln (or 5% of LSR's total revenue) and building materials and aggregates production sales of $817 mln (or 61% of LSR's total revenue). Our DCF-based target price of $17.1/GDR, suggests 17% upside to Friday's closing price. Confirmation of this Ukrainian acquisition reaffirms our positive view of the company, and we reiterate our Buy recommendation on the stock. Deutsche Bank writes: Obukhiv Porous Concrete Plant (OPCP) is a leader in the Ukrainian autoclaved aerated concrete (AAC) market and the key AAC supplier in the Kiev region today. According to the All-Ukrainian Union of Building Materials and Products Manufacturers, the plant has an 18% share of the Ukrainian AAC market and over 50% of the market in the Kiev region. OPCP is located in the city of Obukhiv, 40km from Kiev. In 2007, the company reported output and sales of 150,000m3. As part of an existing contract with Wehrhahn, the world leader in the production of aerated concrete equipment, the plant is completing a project to increase its annual capacity to 350,000m3. OPCP is LSR Group's second aerated concrete project in Ukraine. The first, a new AAC plant with annual capacity of 400,000m3, is under construction in Berezan (70km from Kiev) and is due to be completed this summer.

93. Turboatom Ships to France. Dragon March 31, 2008 Turboatom has dispatched two rolls to Thyssen Krupp Materials France. According to TATM's press service, the rolls will be used for a large rolling mill being built in China.The contract is estimated at USD 500,000 and is for eight rolls.This is the first time such parts have been produced in the Former Soviet Union.


94. Ukrainian Energoatom signs contract with Westinghouse for nuclear fuel supplies RenCap April 1, 2008 Event: Ukrainian Energoatom has signed a five-year contract with American Westinghouse, which should supply at least 630 nuclear fuel assemblies (FAs) in 2011-2015. The price has not been disclosed. The major pre-condition is the certification of Westinghouse's FAs by the Ukrainian State Committee on Nuclear Regulation (SCNR). If the fuel is not certified, Energoatom is permitted to terminate the contract. The head of the SCNR, Elena Mikolaychuk, said that certification would not be completed earlier than 2010. Action: The news is negative-to-neutral for TVEL and Novosibirsk Chemical Concentrates Plant. However, we remain positive on Russian nuclear cycle producers and re-iterate our BUY ratings. Rationale: The change of supplier from TVEL to Westinghouse is negative for TVEL, currently the monopoly supplier. The annual losses at current prices are estimated at $70-75mn (estimated revenue in 2007 is $1.05bn). However, we expect that future contract prices will be increased at least 2.5-3x, so that the negative effect from falling volumes will be compensated for with increased prices as well as the expansion of contracts with Russian and foreign customers. We view the change in suppliers as political decision since Westinghouse's fuel is 50% more expensive and of worse quality, in our view.

95. ZAZ auto plant to renovate facilities Foyil April 2, 2008 Ukravto's deputy CEO Oleg Papashev has announced the plans for its affiliated ZAZ auto plant to cease SKD (semiknocked- down) assembly of Chevrolet and Chery cars at the plant facilities in Illichivsk starting in 2009. ZAZ plans to restructure the production facilities in Illichivsk starting in 2009 to produce commercial vehicles using CKD (complete knockeddown) assembly technology, namely TATA brand trucks and I-VAN brand buses. ZAZ plans to increase production facilities in Illichivsk from 1,800 to 12,000 trucks and from 500 to 5,000 buses annually. Mr. Papashev also announced that Ukravto Group will be forced to lay off some of its employees after Ukraine enters the WTO, since the market conditions for the companies within the Group should worsen. Our view: The news is neutral for Ukravto (the only publicly traded company in the Ukravto Group), since Ukravto does not distribute SKD-assembled Chery or Chevrolet models, but CKD-assembled Daewoo and ZAZ brand cars, produced in a complete cycle. Other local car producers (Avtoinveststroi, Eurocar) lately also announced plans to stop SKD-assembly of cars, which has low valueadded, after Ukraine enters the WTO, since this method will become unprofitable when foreign trade barriers in the car market are eliminated. We believe the announcement about the possible layoffs within Ukravto Group after Ukraine's accession to WTO is a ploy to pressure the government and parliament to create new tax privileges for ZAZ.


KAZAKH INVESTMENT 96. Current account deficit surges to -US$7.2bn in 2007 Visor March 31, 2008 The impact is mitigated by the growth of FDI in the country. Current account deficit surged to -US$7.2bn in 2007 from -US$1.9bn in 2006, the National Bank of Kazakhstan reports in its data. CA deficit to GDP totaled 7.0%, which is in line with our expectations (6.8%). The deficit was caused by a slowdown in the trade balance surplus, while income balance deficit slowed in 2007. The impact of the weakening CA on the economy is mitigated by 65% growth in FDI in Kazakhstan. In our estimations, FDI in Kazakhstan totaled US$17.5bn. This may explain a rapid growth in import of goods and services, which can be partially in FDI form. January 2008 data shows a slowdown in growth of import (7.6% YoY from 38.3% YoY in whole 2007) while the growth in export of goods accelerated to 41.9% YoY from 24.8% in whole 2007. We also see an increase in debt service. Investment income grew 44% to US$14.3bn. FDI in Kazakhstan grew 67% to US$10.2bn net of repayments abroad. As we have already reported, the external debt of Kazakhstan grew 2.2% to US$96bn. Final data for 2007 shows that in Q4 external debt of commercial banks remained flat (the growth is 0.15% QoQ to US$45.9bn, 44% of 2007 GDP) while the debt of other sectors continued to grow. General government debt remained unchanged at US$1.5bn, while external debt of monetary authorities declined 90% to US$0.11bn. We believe that recent acceleration of export (due to increase in commodity export price) and slowdown in import growth will positively impact current account of Kazakhstan in 2008 decreasing risks of corresponding financial outflows from the country. If we see further slowdown in imports and rapid increase in exports, current account deficit may turn into a surplus in 2008.

97. Second well at Zhemchuzhiny to be drilled shortly RenCap April 3, 2008 Event: Kazakhstan Newsline reported earlier this week that a second exploration well is to be drilled at the Zhemchuzhiny (Pearls) hydrocarbons bearing block of Kazakhstan's part of the Caspian Sea in 3Q08. Public hearings about the environmental impact of the well, organised by the project operator, Caspi Meruerty Operating Company (CMOC), were held on 26 Mar in Aktau. The second well is to be drilled at the Auezov prospective structure of the block with the projected depth of about 2,500 meters. Drilling is scheduled to commence in July 2008 and expected to last up to 120 days. This well is to follow the first 2,118-meter exploration well which was drilled at the Khazar structure in 2007. The first well indicated hydrocarbons presence, but not commerciality of the project. With the second well exploration period over, the project will move to the appraisal phase, according to the general


director of Kazakhstan's affiliate of the CMOC, Marcus Antonini. The Zhemchuzhiny project is a PSA signed between Shell (with a 40% stake), NC KazMunaiGas (40%) and the Oman Oil Company (20%). Estimated recoverable oil reserves are around 733mn bbls (quite modest by the shelf's standards). After two major failures with exploration wells in Tyub-Karagan and Kurmangazy structures, success of the second exploration well would help Kazakhstan to regain confidence in the potential resources of the country's section of the Caspian shelf.

98. NC KazMunaiGas considers foreign partnerships RenCap April 1, 2008 Event: Kazakh national company KazMunaiGas (NC KMG) has announced that it is considering new strategic partnerships with a number of Western firms. The reason for this, according to the company, is its need for Western technology, experience and management in order to achieve its long-term goal of tripling its output. KMG president, Uzakbai Karabalin, has not indicated any specific company name saying only that it will be a Western partner. In a Reuters interview, Karabalin cited Norway_s Statoil as the example KMG could follow, having been established and run by the state and favoured by the government until it was big enough to compete. KMG recently unsettled foreign investors when it doubled its stake in the Kashagan project at the expense of foreign companies, following disputes over cost overruns and delays. While the Kashagan project is expected to play a huge part of Kazakhstan_s oil production increase in the future, Karabalin claims that KMG has no immediate plans to enlarge its share of the Kashagan project. He noted that it does not make sense for the company to take a bigger stake in Kashagan given the enormous investments needed to bring the field on stream.

99. Kazakh PM meets Halliburton chairman RenCap April 4, 2008 Event: Kazakhstan Newsline reported yesterday (3 Apr), that Kazakhstan's Prime Minister Karim Masimov met Halliburton chairman David Lesar on 31 Mar. The two reportedly discussed the development of Halliburton's oilfield operations in Kazakhstan. According to the report, Masimov highlighted the importance of Halliburton's training and employment of local personnel, and Lesar stressed the company's commitment to the development of human capital in Kazakhstan. Halliburton has reportedly been involved in various operations in Kazakhstan for the past 10 years. Among its known Kazakh ventures are the 2005 establishment of a national oil database with the Kazakhstan Oil and Gas Institute, an oil drilling programme design on the northwestern Zhetybay oilfield, and various feasibility studies. The company also made headlines in Kazakhstan when it was charged $230mn in mid-2005 for violating Kazakh customs regulations. With oilfield services in high demand in Kazakhstan, we believe the government will be eager to welcome international oilfield services providers to the country.


100. Tethys Petroleum: New discovery and record high flow rate RenCap April 3, 2008 Event: Yesterday (2 Apr), Tethys Petroleum reported record high flow rate test results from its AKK14 well. The well had tested gas from two intervals at a combined rate of 377mcm per day (more than half the company's current production and more than two times the previous single well record). The well was drilled in the central part of the Akkulka block on a separate prospect between the AKK13 and AKK04 discoveries and targeted both the Kyzyloi Sand interval (productive reservoir in Tethys' nearby Kyzyloi Field) and the deeper Tasaran Sand interval. To date, the Tasaran has been deemed unproductive and most of the older shallow gas wells have not targeted this interval. However, analysis of the seismic data acquired by Tethys last year, and subsequent processing to highlight possible gas bearing zones, led Tethys to drill the AKK14 well, not only to explore this new Kyzyloi structure, but also the Tasaran as a secondary target at this location. Well AKK14, therefore, is the first commercial discovery of gas made in the Tasaran Sand area and opens up a new play of the company's Akkulka and Kul-Bas blocks. Action: We believe the news is very positive for the company and reiterate our BUY rating. Rationale: Higher rates of the newly drilled well will allow, in our view, the company to push up its production and, therefore, to move to better contractual terms (higher off-take gas price) earlier than initially expected.

101. Caspian Energy reports 2007 results RenCap April 2, 2008 Event: Yesterday (1 Apr), Caspian Energy (CEK) reported FY07 financial and operating results, which were mixed. Average sales volumes increased 42% to 414 bpd, vs 291 bpd in 2006. Oil and gas revenues were up 49% YoY to CAD6.3mn from CAD4.2mn, while costs increased 65% to CAD19.0mn. The largest contributor to the costs increase was a one-off foreign exchange loss (CAD5.8mn; net of which, costs would have increased just 15%). Net losses more than doubled to CAD13.2mn (from CAD6.4mn) after the foreign exchange loss (or increased to CAD7.4mn net of the one-off). On the operating side, the company reported progress in farming-in its deep prospects (without any specifics), a two-year extension to its exploration stage and the commencement of its first shallow Baktygaryn well (#703). With regard to this year's plans, CEK states that the second Bartygaryn well will be spudded after completion of #703. Negatively, the company's reserves auditor cut CEK's 2P reserves by 0.489mn bbls on technical grounds, most likely reflecting the company's failure to revive wells EZ#302 and EZ#303. Total net 2P reserves as of end 2007 stand at 4.05mn boe. Action: We regard the results as inconclusive.


Rationale: There is little useful new information in the report. For CEK, the most important triggers would be results from Baktygaryn #703, and its ability to complete the farming-in with a strategic partner on the deep reservoirs. The latter should also relieve concerns about the company's ability to finance its minimum work programme.

102. CPC board to meet mid-April to discuss expansion RenCap April 1, 2008 Event: Last week (27 Mar), Interfax-Kazakhstan reported quoting Transneft vice-president Michael Barkov as saying that CPC_s board of directors will meet 16 Apr 2008. At the meeting, Transneft reportedly plans to present a Russian draft resolution on a subsequently amended expansion plan, originally put forward by Chevron on 26 Oct 2007. The Chevron plan referred only to the financing of works to expand the narrowest parts of the CPC pipeline. The Russian shareholders declined the proposal, citing the unprofitability of additional investments. The problem here is that the Russian partners have consistently expressed concerns about the economic ineffectiveness of the project. In April, Transneft proposed a plan to restructure CPC_s debt (the pipeline consortium has yet to service $5bn of debt), which included an increase in transportation tariffs, changes in interest rates and the possibility of eurobond issuance. However, CPC_s shareholders declined the proposals in summer last year, although, in Oct 2007, they agreed to increase tariffs to $38/tonne and cut interest rates to 6% from 12.66%. The CPC's expansion plan envisages expanding the pipeline_s capacity to 67mnt (1.35mn bpd) from 32.6mnt (654.7kbpd). Moreover, if the CPC shareholders fail to sign the resolution document by the end of 2008, it could take them another two years to coordinate a new agreement on expansion. In our view, expansion of the CPC pipeline is required to help Kazakhstan achieve its ambitious production growth plans. Extra volumes from TengizChervoil will require export routes to deliver to the market.

103. Kazakhmys presented its project on construction of Aktogay GOK Visor Capital April 3, 2008 The new plant is expected to treat 50-65mtpa. The Company says it plans to complete the construction in summer 2009. The plant is aimed at replacing the old operating capacities of Zheskazgan business unit. No significant share impact is expected in near term. Kazakhmys (KAZ LN) presented its project "The construction of Aktogay mining-and-processing plant" to the regional authorities. The Head of "Kazakhmys Corporation" LLP, Eduard Ogay and Project Manager, Alexander Lee said that the project is expected to be completed by 3Q2009. The designed capacity on the plant is 50-65mtpa. It is planned that the plant would produce refined copper out of copper concentrate.


The company said that the new plant is aimed at replace old operating capacities of Zheskazgan business unit, in addition, the construction of the plant would support the development of local community Ayagoz district, where the plant would be located. In 2007, Kazakhmys mined 34mt of ore and produced 391kt of copper cathodes. We do not expect any significant share impact in near term. In the long run, however, the Company is expected to benefit from renewed operating capacity.

104. Kazakhstan capital needs to construct 7m square metres of housing by 2016 Visor Capital April 4, 2008 Currently, residential properties in Astana total 10m square metres, or less than 17 metres per capita. In near future, the number of construction companies would decline by 2.5 times while demand in residential housing will be high. It might push the Government and the local authorities to spend more in construction sector. Kazakhstan's capital, Astana, needs to construct at least 7m square metres of housing by 2016 to meet needs of the growing population. Currently, residential properties in Astana total 10m square metres, including 1,852,000 square metres registered in 2006. There are 103 construction companies working in Astana. Only 11% of them will be able to continue working in 2008 while 48% have weak financials and cannot even receive a financial support from the Government, According to statistical data, population of Astana since 2000 rose by 221k people up to 602k in 2007. Astana authorities are planning to spend about KZT125bn (US$1.04bn) for the city's development this year. We see no share impact for publicly traded companies. However, Astana is one of the main consumers of cement and construction materials in Kazakhstan. The city's needs in residential housing and a decline in number of construction companies might push the Government and the local authorities to spend more on the construction sector. We expect the demand for cement and construction materials to remain high.

105. Raiffeisen International considers a greenfield in Kazakhstan RenCap April 3, 2008 Event: Yesterday (2 Apr), Bloomberg quoted Raiffeisen International CEO Herbert Stepic as saying that the bank is considering a greenfield investment in a banking franchise in Kazakhstan. Raiffeisen International has reportedly been seeking an acquisition target in the country since 2006, when it divested a stake in BTA (Kazakhstan's second-largest bank by assets). However, according to Stepic, sellers' asking prices currently far exceed what he regards as fair, which has led management to consider other ways of entering the Kazakh market. Action: Slightly negative for Kazakh bank stocks, in our view.


Rationale: We regard international M&A as a possible key trigger for Kazakh banks, both potential targets and, indirectly, other players, as foreign banks should bring fresh funding and stability to the banking system. Raiffeisen International is among the clearest buyers in the market so if they were to move to an organic growth strategy, it would take one clear bidder out of the picture, which is obviously negative for the M&A trade.

106. Real Estate Investment Trust to be created in Kazakhstan Visor Capital April 4, 2008 The new stock exchange rules allow for listed REITs. This may provide an additional funding mechanism for the over-leveraged real estate sector in the medium term. KASE officials also presented their intentions for trading in a new instrument -- Real Estate Investment Trust (REIT) shares. We assume that any REIT will have asets composed of leased completed properties, and that commercial and residential properties will not be mixed into the same REIT. Income to the investor will come from lease rentals and y gains on disposal of properties. REITs will have professional managers that manage the underlying property portfolio. Both individual and corporate investors will be allowed to invest in REITs. Around 12 mutual funds are being created in 2008. The funds are affiliated to commercial banks and industrial groups. The creation of REITs should also give greater transparency to property values in Kazakhstan. We do not think that they can be used to solve the problems of the real estate developers who potentially hold over-valued, and possibly un-leased, property inventories, as no investor would invest in such a portfolio. The Ask prices for residential real estate in financial capital Almaty fell 43% to US$2,387 per sq m during last 12 month, according to the Krisha real estate paper. Given the current average monthly income in Almaty of US$700 per month, and the current high inflation rate and nominal interest rates, we believe that residential real estate prices could fall to below US$2000 per square metre.

107. Shymkent cement plant to start working again in near future Visor Capital April 4, 2008 The company will invest about US$31m for improving its operational processes and environmental protection over the next 20 months. No share impact for Steppe Cement. Information is interesting in terms of market knowledge. Shymkent-Cement, a cement plant based in South Kazakhstan and owned by the Italcementi Group, will restart production in the near future. As reported below, Shymkent-Cement stopped operating in the beginning of this year, when local authorities voided the cement producer's licence for subsurface use. Recently, Shymkent-Cement and local authorities of South Kazakhstan signed a memorandum of understanding. According to the memorandum, the cement plant is ready to invest about US$31m for improving its operational processes and on environmental protection. Additionally, the company will deliver 85,000 tons of cement to local


authorities at last year's price of KZT8,470 per tonne (US$70.3). This cement will be used for the construction of social facilities. For other customers, the current ex-works cement price is KZT12,000 per tonne (US$99.6). There are four large cement plants in Kazakhstan of which one is publically traded -- Steppe cement (STCM LN). In the light of the news we do not see any significant share impact for Steppe Cement, as the serve different regional markets.

108. Uranium One weak on the back of poor results and falling uranium price RenCap April 3, 2008 Event: Uranium One, a global uranium mining company with key assets in Kazakhstan, the US, and Africa, reported FY07 IAS figures. Revenue was $134mn vs only $50.4mn in 2006. Earnings from mine operations reached $101.8mn in 2007 up from $32.7mn a year ago. However, the sizable G&A at $74.2mn ($24.8mn in 2006), caused by a stock option and restricted share expenses, resulted in weak operating earnings ($9.5mn in 2007). The company used debt financing for business expansion which resulted in an interest expense for $12.5mn. A large income tax payment resulted in a net loss of $17.6mn in 2007. Action: The company was not able to deliver key production figures and we believe the stock will be weak in the near future. Rationale: The company has delayed its key expansion projects and is putting start-ups with a high risk of delays on hold; the core production unit in Kazakhstan experienced trouble last year. Another factor of the expected expansion-programme revision is the correction in the uranium spot price ($71/lb currently, down from a maximum $138/lb last year). Speculative investor activity, which bought into physical uranium a year ago, was down in 2H07, resulting in a significant correction of the market. However, we expect a long-term uranium price of $65-75/lb, and believe the current spot price is close to its bottom. The company remains one of the only global exposures to uranium spot price growth with good long-term prospects due to the global increase in demand, in our view.

109. CTC Media commences operations in Kazakhstan; NEUTRAL Alfa Arpil 2, 2008 Yesterday CTC Media announced that it would re-launch Channel 31 in Kazakhstan, the country's fourth largest with a 7.1% audience share as of 2H07. CTC also operates a TV company in Uzbekistan and is interested in Ukraine, Belarus and Azerbaijan. In the short term, the effect of Kazakh operations will be insignificant. We estimate that its CIS operations (Kazakhstan, Uzbekistan) will contribute only up to 4% of consolidated revenue in 2008. We consider the news to be NEUTRAL for the stock.


OTHER COUNTRIES 110. Armenia plans to offer third GSM licence bne March 31, 2008 Armenia's Ministry of Transport and Communications is to launch a tender for the country's third GSM licence in May. Armenia currently has two mobile networks, both majority owned by Russian telecoms operators. VimpelCom has held a 90% stake in CJSC ArmenTel since December 2006. Mobile TeleSystems (MTS) took an 80% stake in K-Telecom CJSC, which operates under the VivaCell rand in September 2007. According to rumours in the local press, another Russian operator, Megafon, is expected to bid for the new licence. Mobile penetration is growing rapidly in Armenia. According to data from Informa Telecoms & Media, it increased from 33.36% in December 2006 to 54.00% by September 2007.

111. Azerbaijan: Deal on Qazvin-Resht-Astara railway signed bne April 1, 2008 A trilateral memorandum of understanding on the Qazvin-Resht-Astara has been signed between the rail companies of Azerbaijan, Iran and Russia. Russian Railways, Iranian Railways and Azerbaijan's State Railway company have agreed to step up their cooperation on the railway that will link Qazvin in Iran with Astara in Azerbaijan, Interfax reported. The railway will be an important link on the North-South corridor between Finland and the Indian Ocean. A technical feasibility study for the railway is due to be completed by July 2008.

112. Turkmenistan: TNK-BP to provide Turkmenistan with know-how RenCap April 3, 2008 Event: According to oilru.com, a joint working group between the Turkmenistan government and TNK-BP has been established in order to choose the proper development technologies for Turkmenistan's oil and gas deposits. According to TNK-BP's VP for production and exploration, Sergei Brezitskiy, no specific deposits were discussed, only the general notion of developing the country's oil deposits. Brezitskiy


said that any TNK-BP involvement in specific projects in Turkmenistan will have to be carefully considered. TNK-BP has recently stated that it is interested in expanding its activities beyond the Russian boarders, specifically mentioning Kazakhstan, Turkmenistan and Venezuela. The Turkmen government in turn has recently started negotiations with numerous Russian firms (such as LUKOIL, ITERA and TNK-BP) with regard to cooperation in the country's oil and gas deposits, particularly their participation in the development of the Caspian shelf.

113. Ingosstrakh acquires Standard Insurance Group bne April 7, 2008 Ingosstrakh has taken a 76% stake in Uzbek insurance company Standard Insurance Group. Standard is Uzbekistan's fourth largest insurance company with almost 13% of the market, rated by premiums taken during 2007. The company's gross premiums collected in 2007 were UZS9.3bn. Founded in 2005, Standard currently has agencies in Ferghana, Samarkand, Bukhara, Gulistan and offices in Andijan and Akhangaran. It holds licences for the provision of most types of general insurance.

114. Uzbekistan liberalises retail banking sector bne April 2, 2008 Uzbekistan's retail banking sector is expected to open up considerably after a new presidential decree came into force yesterday, April 1. The new law makes several changes to the rules governing retail banks in Uzbekistan, including allowing people to deposit as much money as they wish without having to prove that it was obtained legally. Funds deposited between April 1 2008 and April 1 2009 will also be exempt from taxes. Uzbek president Islam Karimov signed the decree "On additional measures to liberalize the conditions and ensuring guarantees of deposits in commercial banks" into law on February 21. The aim of the decree is to increase public trust in the banking sector, and to encourage people to deposit their money with banks. According to the National Bank of Uzbekistan, funds invested with retail banks have increased 55 times since 2000, despite the limitations in the banking sector. Currently, deposits stand at over UZS1 trillion.


The decree will be effective from April 1, 2008 to April 1, 2009, during which time any individual may open a deposit account and place an unlimited amount of money in national or foreign currency, without providing documents about where the money was obtained This money can be in Uzbek soum or a foreign currency, and can be deposited anonymously, either in cash or by a transfer from a personal accounts in a foreign bank. Banks, law-enforcement agencies, tax and other authorities have been forbidden to inquire about the origins of money deposited with Uzbek retail banks. According to Tashkent-based Avesta Investment Group, the decree is expected to open the way for banks to attract far greater funds than previously in both national and foreign currencies. This is expected to help mortgage and consumer lending to develop, as well as having wider effects such as allowing turnover in the securities market to increase.

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