Инг Банк Евразия

Dear Clients,

Please be informed that this daily is our final report for 2006.

We would like to wish all of you a Merry Christmas and a Happy New Year. Best wishes and prosperity for 2007!

Kind regards,

Research Team

<<06.12.22.pdf>>

FX and money market

Yesterday, the dollar floated in the range of USD1.314-1.321/EUR, although the closing price remained on the same level at USD1.317/EUR. Yesterday''s release of US lower-than-expected GDP figures could have weakened dollar positions, but the actual impact was minimal. Market players are waiting for more releases scheduled for today, such as personal income and spending data. However, we do not rule out that the volatility will remain relatively modest, as overall activity is slowly declining due to the upcoming holidays and abrupt movements are unlikely. On the Russian FX market the rouble remained at RUB26.31/USD, though trading volumes were pretty high on the back of increased rouble demand for VAT payment. We see the rouble within the range RUB26.27-26.32 today, and deviations from the trend of the EUR/USD are very unlikely.

On the money market the situation is stable, with overnight rates at 5-5.5% in the middle of this tax payment period. Nostro balances and CBR deposit accounts are still high at RUB597.8bn, and CBR repo auctions only totalled RUB10.8bn yesterday, which allows us to forecast a steady funds flow for today. On Monday, on the back of mineral tax payments coupled with limited sources of attracting funds (American markets are closing for the holidays), we do not rule out further increase of money market interest rates, although this is expected to be rather short-lived.

Ivan Bokhmat, Moscow (7 495) 771 7994

Rouble bond market

Yesterday, corporate bond prices moved without any clear trend, while the government sector saw a downside trend of 5-15bp triggered by a deterioration of rouble liquidity (overnight interest rates rose to 5-6% from the recent 3%). Currently, local debt is concentrating more on local developments, while external markets are having a rather neutral influence on the local market as activity has calmed down on the back of the forthcoming Christmas holidays.

Primary placements continue to put pressure on secondary trading and demand remains limited. At the beginning of next week on the back of excise and mineral tax payments, the market is likely to face a shortage of rouble liquidity. As a result, we do not rule out that prices will drop somewhat, although such a move should be rather short-lived. We believe that up to the end of the year rouble debt will remain stable and do not expect any price drops as the liquidity environment has improved with the injections of budget money.

Olga Golub, Moscow (7 495) 755 5176

Turkmenistan/CIS

New dictator ahead for Turkmenistan

Turkmenistan''s President Niyazov has died and a mini-coup taken place. Control over the country is in the hands of a power bloc and an illegitimate son of Niyazov

Yesterday, lifelong president Niyazov died, which immediately raised the question of a transition to a new presidency. Turkmenistan is very closed country (information is extremely limited) with a strongly authoritarian style of management and all the signs of a dictatorship, including gold (not golden) monuments of Niyazov, a new history of the nation from ancient times written by Niyazov, a new calendar introduced by him and so on. Natural gas - the country''s main resource, was totally controlled by Niyazov and allowed him to finance his social experiments and support political stability in the country.

Turkmenistan is very clan-oriented country, with the power bloc headed by Akmurad Redjepov being of the most powerful. According to Turkmen Constitution, the speaker of Parliament, Mr Ataev, should have become acting president, but yesterday, he was accused of a crime and imprisoned. After this, Health Minister Gurbanguly Berdymukhamedov was appointed acting president - a choice with a certain logic if we take into account rumours that he is an illegitimate son of Niyazov. The power bloc retains control over the country.

Currently, the situation remains stable, although we expect tough under-the-carpet fight at all levels of authority. Although the Turkmen Constitution does not allow an acting president to participate in new elections, the current administration has already shown that it is very flexible with the constitution and ready to violate it. We think that Gurbanguly Berdymukhamedov has a high chance to become the next president, although, the risk of political destabilisation is also high. Russia''s support of the new (old) team would increase chance for a peaceful scenario - and we cannot rule out additional efforts from them to win this support, for example, if there is good news regarding gas contracts. In a positive outcome, Turkmenistan will continue to fulfil its obligations and commitments and Gazprom will get 50bn cub.m of gas at US$100 a year in 2007-09 (41bn cub.m will go to Ukraine). In a negative case scenario, interruptions in gas supply are possible, which is a risk for Ukraine.

We expect more clarity on Tuesday, when a session of parliament is scheduled.

Investment implications: The Turkmen regime is very authoritarian, non-transparent, and unpredictable. In addition, the role of the Constitution is not very important. Although Russia could win better conditions in its gas contracts with Turkmenistan, risks related to Ukraine''s gas supply are increasing. Currently, violence scenarios/civil war do not like very likely. We expect more clarity next week

Julia Tsepliaeva, Moscow (7 495) 755 5489

Russia

Sakhalin-2

Gazprom wins control over Sakhalin-2 at expense of foreign investors

Yesterday, President Putin congratulated Gazprom, Mitsubishi, Mitsui, and Royal Dutch Shell for reaching an agreement on the Sakhalin-2 project. Gazprom has won the control over the project and will pay US$7.45bn for 50% plus 1 share of Sakhalin Energy. The current share holders (Royal Dutch Shell with 55%, Mitsubishi with 20%, and Mitsui with 25%) will sell a half of their shares and be paid proportionally.

The deal was preceded by an aggressive campaign against foreign investors under ecologic banners, which did not improve Russia''s image at all. The deal itself could be strongly criticised in that foreign investors will receive several billions less market price, which confirms the view that political risks in Russia have not disappeared and property rights are not protected properly, although Yukos style re-distribution of assets are unlikely.

On the other hand, such processes are quite typical for CIS countries in general. For example, the Kazakh government is also consolidating oil assets. In addition, the Russian side strongly refers to the fact that the previous deal with foreign investors took place in the mid-nineties, when Russia was weak and the contract was not fair for it. Now, when Russia has become much stronger, the government has decided not to accept new delays in receiving of Russia''s share of proceeds (foreign investors decided to increase the investment programme from US$10bn to US20bn, which had the potential to postpone flows to the Russian budget by several years). It is also clear that the current administration has strategically chosen a policy to expand Gazprom''s assets and turn it into a real giant. It is not surprising that Gazprom won this piece of pie.

Investment implications: The deal is very favourable for Gazprom, which was strongly supported by the government. Foreign investors were forced to sell with discount to the market, which is not good for Russia''s image in general. At the same time, investors will get US$7.5bn - which may cover their investments - and help Russia avoid a reputation as an expropriator.

Julia Tsepliaeva, Moscow (7 495) 755 5489

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