Possible Oil Tax Cut Gives Markets a Lift

While TNK-BP's troubles may have been grabbing the wrong sort of headlines, last week's key economic news came from Finance Minister Alexei Kudrin, who proposed a $4.2 billion cut in annual oil taxes from next year, an eagerly awaited move that provided an overdue boost for oil stocks.

The proposals, to a meeting of officials at the Economic Development and Trade Ministry on Tuesday, come at a time of soaring oil prices. Shying short of its recent high of more than $109 per barrel, crude oil in New York remained buoyant, closing at $105.62 per barrel by at the close of the week. Oil was closely tracked by other commodities, including nickel and copper.

"[It's the] overall sentiment," said Ivan Mazalov, a director at Prosperity Capital Management, which manages $5 billion in Russia-focused funds. The prospect of an easing in the tax burden "plus oil stocks are beaten down more than should have [been] and the oil price is high. All that put together has created demand for oil stocks."

Although the proposed tax breaks are modest -- adding 5 percent to 6 percent to earnings, analysts said -- there were hopes that it might herald a more focused approach to tackling the sector's taxation system.

Oil blue chips have had a rough time of it over the past year, battered by high oil taxes that have prevented them from cashing in on sky-high crude prices. Meanwhile, the windfall profits have accumulated in the government's stabilization fund, now split into two separate funds, to provide a cushion against a national fiscal shortfall.

Still, Kudrin's comments took a little while to feed through into gains for oil stocks. On Thursday, Rosneft moved up 4.1 percent and LUKoil 3.5 percent. Over the week, LUKoil's stock rose by an impressive 12.3 percent, on hopes that chief executive Vagit Alekperov's talks in Baghdad would lead to the company getting back into the giant West Qurna oil field in southern Iraq. LUKoil, in partnership with ConocoPhillips, still faces tough competition for the contract, however, as the Iraqi government is also considering bids for the project by Total and Chevron.

Gas producers Gazprom and Novatek also made decent gains, up 3.6 percent and 3.3 percent, respectively, after they were buoyed by signals that there would be no increase in gas taxes in the near term.

Yet good news for oil was tempered by not so good news for the economy.

In his comments Tuesday, Kudrin also said that changes to the value-added-tax regime would be put off until 2010 at least, a change that analysts have viewed as an important step toward encouraging economic diversification.

Metal stocks were also benefiting from higher prices for nickel, copper and zinc, while gold regained some of its luster midweek before dropping back Friday to $930.60 per ounce after a strengthening in the dollar.

Trading on both Russian indexes remained weak amid the ongoing fallout in Western markets. There was some respite to be gained, though, in JPMorgan's revised $1 billion offer for Bear Stearns, after the once-mighty investment bank was saved from collapse a week earlier with a much-lower bailout bid backed by the U.S. Federal Reserve.

The benchmark RTS index rose to 2049.40 points, up 4.3 percent on the week, while MICEX climbed to 1627.87, a gain of 3.3 percent. Sentiment was helped, analysts said, by Moody's ratings agency saying in a report that it was considering an upgrade of Russia's sovereign ratings and 10 of the country's banking stocks in light of its relative economic stability.

"Russia is going to be able to stand clear of the credit crunch and grow, thanks to its own sources of money and domestic drivers," said Kingsmill Bond, a strategist at Troika Dialog.

But banking stocks continue to suffer, battered by the tailwinds from the global turmoil. VTB, which announced a move into investment banking midweek, is now down around 45 percent from its May 2007 initial public offering, while Sberbank endured another knock on a Vedomosti report Friday that half of the bank's credits at some branches were "compromised" after staff failed to follow correct procedures before approving loans.

Sberbank closed the week down 1.5 percent.