External Debt Strategy Alexei Moisseev + 7 495 258 7946

External Debt Strategy

Exhausted by high volatility, investors seem unwilling to take additional risks and are trying to unwind their long positions as the publication of the US unemployment data gets closer. The actual rate of employment growth in the US is unlikely to exceed expectations, which are currently quite optimistic. In this environment, the yield of US Treasuries is likely to grow until the unemployment indicators are published. However, this trend is likely to reverse after the data is released. Against a backdrop of current market jitters, our stance that the spreads of Russian eurobonds are likely to get wider remains unchanged.

Alexei Moisseev

Telephone: + 7 0495 258 7946

Nargiz Sadykhova

Telephone: +7 501 258-4356

2005 Renaissance Securities (Cyprus) Limited. Regulated by the Cyprus Securities and Exchange Commission (Licence No: KEPEY 053/04).

Domestic Debt Strategy

Today we are expecting a moderate upsurge of rouble bonds in the short segment of the yield curve supported by liquidity growth in the banking system. At the same time, rouble depreciation on the forex market is likely to put some pressure on Moscow issues. As a result, we expect some increase in the yields of Moscow bonds in the medium section of the yield curve.

Yesterday our expectations proved to be justified, as we saw some recovery in the money market. At midday, during yesterday’s trading session on MICEX, the overnight rates had dropped to 3-4%. However, a weaker rouble, following the depreciation of the euro, cast a shadow on moderate positive sentiment on the domestic debt market. Nevertheless, by the end of trading on MICEX, there was an uptrend in some of the liquid bonds, largely in the first-tier segment where the best performing instruments were the Gazprom 5, FSK 2, LUKOIL, Moscow 36 and 38, Moscow Region 5. With trading volumes high, the second-tier corporate segment also enjoyed selective demand. Its best performers were the MegaFon 1 and 3 and Uralsviazinform.

FOREX Strategy

Yesterday the outcome of the meeting of the European Central Bank’s (ECB) Governing Council confirmed our worst expectations. Although the Governing Council approved a 25 basis points (bp) increase of the ECB’s interest rate, subsequent comments and a press release effectively undermined the impact of the rate hike. Following the meeting ECB President Jean-Claude Trichet stated that there had been no final decision made on further rate hikes. Moreover, inflation risk estimates provided in the ECB’s press release were more relaxed than in previous statements. This rate hike may signal the end of the short-lived Eurozone rate hikes cycle, and, as a result, it likely removes support factors for the euro, in our view.

The growth in liquidity in the banking system that began yesterday is likely to continue today. However, the expected decline in the interbank overnight rate will depend entirely on rouble dynamics in the forex market, as banks are unwilling to sell US dollars in anticipation of a further depreciation of the rouble.

Issuers News Petr Grishin +7 501 258-7789

S&P Upgrades Rosneft

Standard and Poor's (S&P) yesterday upgraded its rating of Rosneft by two notches to B+ (Positive). The upgrade comes following Rosneft's reported 1H05 results, which show that the improvement in the company's cash flow generating ability (due to its acquisition of Yugansneftegas) compensates for its dramatic increase in debt. Commenting on the upgrade, S&P noted Rosneft's success in refinancing short-term debt and resolving breaches of covenants. However, the company's rating remains constrained by its large absolute total debt, its aggressive debt management policy and by a possible risk of litigation relating to its Yuganskneftegaz acquisition and its planned group consolidation. S&P also commented that Rosneft's rating could be further increased if the company resolves or lowers a number of risk factors including its Yugansk tax claims and litigation risk, the lengthening of its debt maturity profile and if its parent, Rosneftegas, resolves the uncertainty surrounding the refinancing of its USD7.5 billion debt.

The S&P’s upgrade of Rosneft brings the company closer in line with its Moody’s (Baa2, Stable) and Fitch (BB+, Positive) ratings. Still, Rosneft remains a rare case in which such a huge difference of opinion exists, which we believe, has its root in the agencies' different perceptions of Russian risks. Rosneft is now rated on a par with the S&P ratings of EvrazHolding (B+, Positive), and WBD, MegaFon and Severstal (all B+, Stable).

Pavel Mamai

Telephone: + 7 495 258 8807

2005 Renaissance Securities (Cyprus) Limited.  Regulated by the Cyprus Securities and Exchange Commission (Licence No: KEPEY 053/04).

Ukrsibbank - Ukrainian Bank Acquisition Frenzy Continues

Reuters yesterday reported that BNP Paribas (France) is in advanced and exclusive negotiations with Ukrsibbank's shareholders about the purchase of a 51% stake in Ukrsibbank. BNP Paribas' interest in Ukrsibbank fits into their strategy to build a significant retail banking presence in Eastern Europe. In line with this strategy, Urksibbank, if acquired by BNP Paribas, will benefit from integration into the French bank's retail banking network, the transfer of Western management and banking technology and a strong likelihood of support. We would view closing this deal as a trigger to significant tightening in Urksibbank's eurobond spread.

Every merger and acquisition deal in Russia and Ukraine carries a significant risk of failure, in our view, and both institutions have already experienced this (BNP Paribas with its failed acquisition of a stake in Russian Standard Bank and Ukrsibbank with its failed attempt to sell itself to Alfa Bank). We still recommend buying the more liquid Ukrsibbank 08 eurobond. The possible upside resulting from a successful acquisition seems much more significant than the possible downside if the bank is not acquired, in our view.

Pavel Mamai

Telephone: + 7 495 258 8807

2005 Renaissance Securities (Cyprus) Limited.  Regulated by the Cyprus Securities and Exchange Commission (Licence No: KEPEY 053/04).

Amtel-Vredestein: Further Expansion into Regions

Vedomosti reported today that Amtel-Vredestein NV has decided to acquire about 40 retail and tyre service centres in Russia. The targeted regions for these acquisitions are St. Petersburg, Perm and Kemerovo Region. No details of the deal were provided. In September the company purchased several large-scale retail chains - Koleso, Rosshina and UVL Plus. Russia’s regions offer high growth potential, thus the expansion of Amtel into regions is an important step in its strategy to establish a proprietary retail business, in our view. From these retail centres, the tyre producer plans to promote premium and mid-market brands.

Angelina Valavina

Telephone: + 7 501 204 4462

2005 Renaissance Securities (Cyprus) Limited. Regulated by the Cyprus Securities and Exchange Commission (Licence No: KEPEY 053/04).

MEDIUM-TERM Recommendations Eduard Jabarov +7 495 258 7907

External Debt

In recent weeks the yields of long US Treasuries were moving up on fears of higher inflation in the US. We believe, however, that inflationary concerns should not necessarily lead to a steady rise in yields, and hope to see them going down soon. One of the classic reasons behind a yield curve inversion is potentially growing but restrained inflation coupled with an aggressive monetary policy, which we have seen in the US for a year. A tightening of monetary policy signals the market that the authorities are determined to control inflation in the longer term despite short-run inflation risks. This leads to an increased demand for US Treasuries in the long part of the yield curve. Therefore, given the current environment in the US, we expect the US Treasuries yield curve to invert. We believe that yield growth in the short part of the curve is not the only, nor major reason for the inversion, rather it is due to decreasing yields in the long part of the curve. That said, it is exactly the long part of the yield curve that offers primary opportunities for investors in Russian eurobonds.

Alexei Moisseev

Telephone: + 7 0495 258 7946

2005 Renaissance Securities (Cyprus) Limited.  Regulated by the Cyprus Securities and Exchange Commission (Licence No: KEPEY 053/04).

Ukranian Debt - Industrial Union of Donbass' CLN

The Industrial Union of Donbass (ISD) launched its LPN in a difficult market environment, following the resignation of the Ukrainian government. The timing of the issue resulted in wider credit spreads than our fair estimates. However, now, most of the risks (in particular political uncertainty and the negative steel price environment) have been mitigated and we believe that recent developments merit tighter 80 bps spreads for ISD's LPN.

Petr Grishin

Telephone: +7 501 258-7789

2005 Renaissance Securities (Cyprus) Limited.Regulated by the Cyprus Securities and Exchange Commission (Licence No: KEPEY 053/04).

Rouble Bonds - South Telecom 1 and 3

South Telecom’s 1H05 IAS results indicate that the company’s new management has taken their first steps in bringing costs under control, thereby reducing capex and debt growth, although the company's leverage and its dependence on banks and financial markets remains high. We do not think that the market has begun to price in South Telecom’s positive changes: South Telecom bond’s credit spreads are 200-250 basis points (bps) compared to those of other RTOs. We recommend buying the more liquid South Telecom 1 and 3 bonds, expecting a spread tightening potential of around 50 bps.

Pavel Mamai

Telephone: + 7 495 258 8807

2005 Renaissance Securities (Cyprus) Limited.  Regulated by the Cyprus Securities and Exchange Commission (Licence No: KEPEY 053/04).

Rouble Bonds - Evroset

We reiterate our recommendation to build long positions in Evroset bonds, since the publication of its IAS financials and its planned eurobond placement are likely to trigger a re-rating of this credit by the market.

Pavel Mamai

Telephone: + 7 495 258 8807

2005 Renaissance Securities (Cyprus) Limited.  Regulated by the Cyprus Securities and Exchange Commission (Licence No: KEPEY 053/04).

Rouble Bonds - Moscow-29

We are taking a long position in Moscow-29 bonds given that the medium-term market segment is currently undervalued compared to the long-term curve section and if there is a downward correction of long-term first-tier issues (although we do not expect one), medium-term instruments will become the most attractive assets.

Eduard Jabarov

Telephone: +7 495 258 7907

2005 Renaissance Securities (Cyprus) Limited. Regulated by the Cyprus Securities and Exchange Commission (Licence No: KEPEY 053/04).

Rouble Bonds - MegaFon-3, Siberia Telecom-3 and Uralsvyazinform-5

We recommend buying MegaFon-3, Siberia Telecom-3 and Uralsvyazinform-5. Since August the spreads of these instruments to the benchmark yield curve is widening by an average of 60-70 bps, which is likely connected to faster decreasing yields of Moscow debt due to aggressive buying of these quasi-sovereign instruments by non-residents.

Eduard Jabarov

Telephone: +7 495 258 7907

2005 Renaissance Securities (Cyprus) Limited.  Regulated by the Cyprus Securities and Exchange Commission (Licence No: KEPEY 053/04).

Rouble Bonds - Gazprom-5

Gazprom-5 data suggests that since mid-September 2005 its spread widened much faster than that of the Gazprom-4 bond, despite the difference in their durations. Therefore, we would be buyers of the Gazprom-5 debt. The fair spread of this instrument to the benchmark yield curve should be in the range of 0-20 basis points (bps), i.e.around 100 bps tighter than the current level.

Eduard Jabarov

Telephone: +7 495 258 7907

2005 Renaissance Securities (Cyprus) Limited.  Regulated by the Cyprus Securities and Exchange Commission (Licence No: KEPEY 053/04).

Rouble Bonds - East Line Handling-2

Although we are inclined to believe that the dispute between East Line and Rosimuschestvo will be resolved amicably, it can last for some time, possibly triggering negative news flow in the near future. Therefore, we recommend that speculators close long positions in the East Line Handling-2 bond, with a view towards reopening positions when levels are more attractive.

Pavel Mamai

Telephone: + 7 495 258 8807

2005 Renaissance Securities (Cyprus) Limited.  Regulated by the Cyprus Securities and Exchange Commission (Licence No: KEPEY 053/04).

Mid-Term Recommendations

Bond Recommendation

Recommendation Date Initial Price Current Price P & L Reference Index

BID ASK BID ASK USD/RUB* % p.a. USD/RUB* % p.a.

Russian Eurobonds

TNK 07 long position 19-Apr-05 110.6 111.1 108.8 109.2 4.15 6.55 7.37 11.6

Ukrainian Eurobonds

ISD 10 long position 29-Nov-05 99.6 99.8 99.6 100.1 -0.11 -9.56 -0.27 -24.0

UkrSibBank 08 long position 02-Dec-05 102.8 102.9 102.8 102.9 -0.024 -8.80 0.00 0.00

Domestic Bonds

Gazprom-5 long position 07-Nov-05 102.1 102.3 101.0 102.4 -0.79 -11.1 0.21 2.92

Euroset-01 long position 05-Sep-05 103.1 103.4 102.1 102.2 2.58 10.6 1.74 7.15

EAST LINE-2 long position 15-Aug-05 100.2 100.4 99.8 100.0 2.90 9.63 3.03 10.1

MegaFon-3 long position 26-Sep-05 103.2 103.4 103.1 104.5 1.33 7.13 1.10 5.91

Moscow-29 long position 13-Sep-05 108.3 108.5 109.2 109.4 2.69 12.1 1.48 6.69

SibTel-5 long position 26-Sep-05 103.3 103.4 102.6 102.8 0.84 4.49 1.10 5.91

URSI-5 long position 19-Sep-05 103.2 103.4 102.6 103.1 1.00 4.89 1.11 5.39

South Telecom-1 long position 22-Nov-05 103.5 104.0 103.7 103.8 0.14 4.76 0.032 1.08

South Telecom-3 long position 22-Nov-05 101.1 101.2 100.9 100.9 0.020 0.68 0.032 1.08

* Income on 100 USD / RUB investment

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2005 Renaissance Securities (Cyprus) Limited.

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