Sibir Energy now ready to progress to growth and profit

Hi agin guys

This is how Australia views Russian Oil....

Russia's stock market boom built on slippery foundation of oil
Arkady Ostrovsky
December 30, 2005
THIS time last year, foreign investors watched in horror as Russia renationalised the main part of Yukos, the oil company once owned by Mikhail Khodorkovsky, the tycoon now serving eight years in a prison camp.

A year on, they last week saw President Vladimir Putin sign off on the Government's long-term promise to liberalise Gazprom's shares, allowing foreign investors to own up to 49 per cent of the Russian state energy giant.

From the renationalisation of Yukos to the opening up of Gazprom, the RTS stock market index has risen 80 per cent, closing yesterday at 1115.92.

The liberalisation of Gazprom shares is a valuable gift to foreign investors, who until now could only own American Depositary Receipts, much pricier than domestic shares. It is also a boost for Gazprom, which will overtake Samsung as the largest emerging-market company in the world.

"Last year was the year of Yukos. This year is the year of Gazprom," says Eric Kraus, chief strategist at Sovlink Securities, a Russian brokerage.
The market will also have the impending global listing of Rosneft, valued at $US60 billion ($82billion), to take on.

In fact, the rally in the Russian stock market this year started only after Khodorkovsky's sentence had been read out. So, for most of this year investors have been waiting to see if the Government was going to have another Yukos-style expropriation of assets.

With a few days left of the year, investors can breathe a sigh of relief on that front. But the shadow of the Yukos affair still looms large in the mind of most investors and the mood in the market remains cautious. Brunswick UBS chief strategist Al Breach says: "There is a decent amount of scepticism among foreign investors. They are more mindful of the risks than they were before Yukos."

He also argues that while this year's 80 per cent rise appears impressive, it should be viewed in the context of last year's dismal performance when the market grew by barely 5 per cent, thanks to the Government's attack on Yukos. "This year's rally accounts for two years," Breach says.

In fact, measured from April 2004 when the Yukos campaign was at its peak, the Russian market only rose 40 per cent, he says. During the same period many international oil stocks rose 50 per cent. Given that oil accounts for about 65-70 per cent of the Russian market, this performance may be less impressive than it looks, Breach says.

Analysts say the rising oil price was the single biggest driver of the Russian market last year. Andrei Illarionov, the outspoken and now departed adviser to Putin, said: "The dynamic of the Russian stock market is the result not solely or largely of internal economic policy, but the result of the changes in the prices of fuel and energy. And in recent years the link has become even more pronounced."

Alfa Bank chief strategist Christopher Weafer says: "The oil price remains the critical factor in the investment decision in Russia." This year, the average price of Russian oil has gone up from $US35 to $US51 a barrel, a rise of 45 per cent. At current oil prices, Russia is earning $US450million a day.

Weafer argues that burgeoning oil receipts provide liquidity for Russian investors who once played a minor role in their own market but now account for 70 per cent of all activity.

On the other hand, foreign investors, who dominated the market a few years ago, now account for just 30 per cent. "If the oil price were to fall we would have a problem," Weafer says.

A more serious problem, however, is that Russia is becoming more dependent on oil and gas receipts, wasting an opportunity to diversify its economy, Weafer says.

Analysts say that instead of stimulating growth and creating conditions for the development of private business, the Russian Government has been busy accumulating control of strategic sectors of the economy, particularly oil and gas.

Earlier this year Gazprom bought Sibneft, a private oil company, for $US13 billion, and the Government increased its share in Gazprom from 39 to 51 per cent.

And while investing in a state-backed company could be safer than investing in a private one, it is hardly a recipe for growth.

Weafer says: "A model based on state control over key industries has never been sustainable. It can work while there is money around but it is not the model for growth." -----------------------------------------------------------------------------

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