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. Last Updated: 07/27/2016

Gazprom Spearheading Bull Market

Stocks are hitting new peaks after months of government officials, from President Vladimir Putin down, touting energy supplies and security as the centerpiece of Russia's G8 presidency.

Putin has penned articles in the international press promoting the energy issue, the Kremlin hosted a February summit of Group of Eight finance ministers at which energy took center stage, and Russia is leading the world in developing its nuclear-energy market.

While oil and gas stocks have spearheaded the rise, nonenergy companies such as Norilsk Nickel, UES and Sberbank have similarly helped boost Russia's second major trading spree of 2006, following the January-February boom. State-controlled oil and gas behemoth Gazprom is leading the rally, becoming the world's sixth-largest company Monday when its market value hit $227 billion, putting it ahead of Royal Dutch Shell. The Russian firm is now $10 billion behind oil giant British Petroleum.

The country's economic fate is closely intertwined with Gazprom, which pays a full 20 percent of all tax revenues going to the federal government. More than once, the Kremlin has used Gazprom as a negotiating chip to gain political influence abroad -- most recently, in Belarus and Moldova.

But some London investment bankers believe the energy company has become overvalued. And ratings agency Standard & Poor's on Tuesday questioned Gazprom's dependability as a gas provider to Europe, issuing an 11-page report detailing concerns about Russia and Gazprom.

"We have some issues with policy predictability in Russia," David Beers, head of the agency's sovereign ratings division, said in a Moscow briefing Tuesday. Russia's sovereign rating is BBB, one notch below Saudi Arabia's A, which Beers attributed to Saudi Arabia's higher net incomes and assets.

Any upgrade of the sovereign rating, which indicates how risky it is to invest in a country, would require structural reform and a tight fiscal policy, Beers said, noting that may be tough given the presidential election in 2008.

In the Tuesday report, Standard & Poor's said that despite the good news for Gazprom, it would not upgrade its rating of the company, citing institutional and transit risks. "We would review Gazprom for an upgrade when we see the company has greater commercial independence," Alexei Novikov, head of Standard & Poor in Russia and the CIS, said at the Tuesday briefing.

While the Standard & Poor's report resonated with some London investment banks, it drew sharp criticism in Moscow, where analysts said the Russian government was unlikely to heed the ratings firm's advice.

Meanwhile, the two biggest ratings agencies, Fitch and Moody's, could upgrade Russia's sovereign rating this year given the country's expected budget surplus, said Yevgeny Nadorshin, an economist with Trust investment bank. Russia's fiscal indicators and debt rating already merit a higher sovereign rating, added Mikhail Galkin, a Trust analyst familiar with S&P's methodology.

Still, Nadorshin suggested, Standard & Poor's concerns about government spending were legitimate: State spending has increased this year at a rate surpassing economic growth, Nadorshin said. In 2006, Russia's federal budget will make up 17.5 percent of the country's gross domestic product, a 22 percent rise over the previous year, he said.

But, Nadorshin added, the spending splurge has not had many negative impacts, the Kremlin's struggle to rein in inflation notwithstanding. Deutsche UFG on Monday cited Vneshtorgbank's recent issue of long-term eurobonds in rubles -- the first time that a ruble-denominated eurobond has been placed in international markets -- as an example of confidence in the country's economic health.

It seems that other foreign investors feel the same way. While inflows of money into funds that invest in Russia and the Commonwealth of Independent States temporarily slackened last month, as the domestic market corrected after it gained a quick 32 percent in the first two months of the year, interest in Moscow stocks has revived, said Erik DePoy, an equity strategist with Alfa Bank.

In March, India eclipsed Russia as a hot emerging market, DePoy added. In the last week, he said, Russia has rejoined India in first place. More than $1 billion has been added to Russia- and CIS-focused funds since January, DePoy said.

Also driving Russian stocks is the transformation of the energy sector, more mergers and acquisitions and high commodity prices, he said.

Still, DePoy said, "the bottom line is energy. The foie gras for investors this year will be when Gazprom picks its Shtockmann partners." Gazprom has plans to develop the Shtokman gas field in the Barents Sea with foreign partners.

How this project fares -- and how Gazprom fares on the world stage -- will dramatically impact Russia's overall well-being, said Yulia Tseplyaeva, chief economist at ING Bank in Moscow.

While Gazprom may continue attracting investors, it will never be an independent company, Tseplyaeva said, raising questions about Russia's portrayal of itself as a modern, free-market state when it hosts the G8 summit in St. Petersburg this summer.

"Gazprom is a state," Tseplyaeva said. "It is too much a part of the Russian sovereign state to become a corporation in its own right. It would be great for Gazprom to act like a profit maximizer, but we will not see this before 2008, and I highly doubt we'll see it after that."