Rosneft Debt Worries Push Markets Down

Headwinds from global markets continued to buffet Russian stocks in a volatile week of trading.

The benchmark RTS index fluctuated during the week to close down 4.9 percent at 1870.93 points -- a loss of 18.3 percent so far this year -- while MICEX dropped 4.4 percent to 1568.88 points as the markets continue to respond to a bear trend in global equities.

Rosneft, the world's largest oil company by reserves, tumbled 7.3 percent for the week, generating yet more gloom for investors. The share price is now lagging by nearly 30 percent for the year to date on the RTS, while it is down 10 percent down from the IPO price of July 2006. Analysts pointed to a combination of problems at its Sakhalin-I project, where production forecasts have been downgraded by 28 percent, along with concern over company debt levels.

"Much of the downward momentum was generated by Rosneft, whose debt position is rumored to be much larger than that officially admitted by the company," UralSib analysts wrote in a note Wednesday. "Without some tax breaks in the future, sentiment towards Russia's oil producer will remain tepid at best."

In mid-January, Rosneft said it was exploring ways to reduce its $27.8 billion in debt, which it racked up in acquiring the assets of bankrupt Yukos. The oil major is considering selling some smaller assets to lessen the burden, while Vedomosti reported mid-week that the major had won government approval to reorganize $1.3 billion of its debt.

Evraz Group was one of the few bright spots among the blue chips, jumping 6.5 percent in London after UBS raised its price recommendation.

Norilsk Nickel, which finished the week down 4 percent, dominated much of last week's news flow, as the miner's struggle to resist a full takeover bid from RusAl intensified amid concerns over the valuation minority shareholders will receive.

Britain's Telegraph reported that Norilsk CEO Denis Morozov was in London lobbying investors to vote against a board change being pushed by RusAl, which is in the process of acquiring a blocking stake. Large volumes of Norilsk shares were traded in London and Moscow as Vladimir Potanin, the other major shareholder, was rumored to be buying up stock on the open market to strengthen his hand against RusAl.

Global markets continue to drag down Russian stocks, and a series of poor earnings from the United States and Europe added fuel to fears of a slowdown. A Bank of England cut exacerbated concerns of a knock-on effect in Europe.

After several rate cuts and a hefty stimulus package in the United States, however, analysts from Goldman Sachs said the anticipated slowdown might be less far-reaching than expected.

"Markets have begun to question the extent of the economic slowdown ahead and have, accordingly, scaled back recession risks," wrote Goldman Sachs in a note. "Our best guess now is that the mild recession that started in late 2007 will end by mid-2008."

But don't go shopping yet, warned Alfa Bank.

"We advise those in search of bargains in the Russian market to deploy no more than part of their assets at this time, as stocks may well be on sale at even lower prices in the near future," the bank said in a note.