- Net result for the period was USD 160.76 mln (Jan 1, 2007–Mar 31, 2007: 3.41). Earnings per share was USD 3.49 (0.07).
- The net asset value of the company was USD 964.92 mln (Dec 31, 2007: 803.95) on March 31, 2008, corresponding to USD 20.97 (17.47) per share. Given a SEK/USD exchange rate of 5.9423 the corresponding values were SEK 5,733.82 mln and SEK 124.59, respectively.
- The group’s net asset value per share in USD increased by 20.04% over the period January 1, 2008–March 31, 2008. During the same period the RTS index decreased by 10.37% in USD terms.
- The number of outstanding shares at the end of the period was 46,020,901.
- The net asset value per share of Vostok Nafta as of April 30, 2008 was USD 20.62 (SEK 123.39).
Background
Vostok Nafta Investment Ltd was incorporated in Bermuda on April 5, 2007 with corporate identity number 39861.
As at March 31, 2008 the Group consists of one Bermudian parent company, one wholly owned Bermudian subsidiary, one wholly owned Cypriot subsidiary, two wholly owned Russian subsidiaries and one wholly owned Swedish subsidiary. The Swedish Depository Receipts of Vostok Nafta (SDB) are from July 4, 2007, listed on the OMX Nordic Exchange Stockholm (previously the Stockholm Stock Exchange), Mid Cap segment, with the ticker VNIL SDB.
The financial year is January 1–December 31.
Group – results for the period and net asset value
During the period, the result from financial assets at fair value through profit or loss amounted to USD 86.32 (–2.74) mln. Result from investments in associated companies was USD 70.45 (1.99) mln. Dividend income was USD 3.27 (5.95) mln. Interest income from loan receivables was USD 1.23 (–) mln.
Operating costs were USD –1.50 (–0.90) mln.
Net financial items were USD 0.33 (0.00) mln.
Net result for the period was USD 160.76 (3.41) mln.
Total shareholders’ equity amounted to USD 964.92 (803.95) mln on March 31, 2008.
Parent company
The parent company finances the Cypriot subsidiary's operations on market terms. The net result for the period was USD 2.55 mln.
Liquid assets
The liquid assets of the group, defined as cash and bank deposits adjusted for concluded but not yet settled share transactions, amounted to USD 31.65 (30.70) mln on March 31, 2008.
Management report
The pressure on global equity markets has eased somewhat as people now seem to believe that the financial system is out of the woods. When history books are written it will be the bail-out (not of the shareholders though) of Bear Sterns that proved up the resolve of the US authorities that was needed to save the system as such. As the debate now roars on how deep and how long the global recession will be, the commodity markets are stronger than ever before. Why? The supply shock is catching on in a way that recession inspired falling demand can not stop. US oil demand fell by 1 mln barrels a day year-on-year and the oil price went to another inflation adjusted all time high. Exxon cannot keep up its production growth and all the new reserves are in non-Opec countries closed off to the transparency that capital markets long for. This is naturally positive for Russia. Coupled with a very strong economy (where overheating is a more of a realistic risk) and a political outcome that is as close to perfect (for Russia) that one can come valuations are poised to continue going higher.
The quarter has seen us take some profits in our coal investments. Coal valuations globally have been driven higher due to the supply problems that we have witnessed in Asia. This is positive for the Russian coal producer but for the thermal ones still only marginally. Russia’s clogged port system puts limits to the imports and exports on for example thermal coal which makes price equalisation with global markets difficult. Russian coal valuations have gone up, but for the wrong reason, which leads us to take some profits. We will be keeping a close eye on the sector going forward.
In the meantime our work with the existing portfolio and the quest for new investments goes on.
Macro
The appointments following the inauguration of president Medvedev and endorsement of prime minister Putin did not bring many surprises. The core of the team that was formed in the past 8 years remains intact. On the margin, one may argue that the relative weight of siloviki has decreased, and the relative role of liberals went somewhat up. Sergei Ivanov was notably downgraded from first deputy prime minister to a ‘regular’ deputy prime minister. Viktor Ivanov, the former head of presidential HR, moved to head the federal anti-drug agency. Viktor Ustinov, former Justice minister and another member of ‘siloviki’, moved to become the presidential envoy to the South Federal District. At the same time, appointment of ‘liberal’ Igor Shuvalov to first deputy prime minister is somewhat balanced by appointment as deputy prime minister of Igor Sechin, another prominent figure from the ‘siloviki’ camp.
One unsurprising conclusion one makes from all those appointments is that Vladimir Putin is going to remain in charge. His introductory speech as the new prime minister also effectively puts him in charge of his ambitious plans to improve quality of life of ordinary Russians through higher incomes, better education, healthcare, housing and other important aspects of welfare. He also emphasized as his strategic objectives supporting international expansion of Russian corporates, promoting national capital markets and optimizing government expenditures. Finally, he stressed the importance of decreasing the tax burden on the oil sector, a task which will possibly be the easiest to achieve.
Observers note that Vladimir Putin in his recent speeches and public appearances seems to be really committed and focused on the idea of Russia’s modernization. He will certainly need a lot of determination, as there are a number of difficulties to face. First, Putin’s government has to deal with inflation. Recent opinion polls show that 62% of the population view inflation as priority task for the government. In a global environment of rising commodity prices fighting inflation is not an easy task, made all the more difficult by the government’s plan to bring domestic gas prices gradually in line with the European prices. Second, corruption remains a threat to any effective implementation of the Putin’s plan. According to a recent opinion poll, 27% of respondents believe government officials are corrupt. Third, the current team, both in the government and in the presidential administration, needs a heavier presence of liberal economists and professional managers in order to succeed in its attempts to modernize Russia. At the moment, it seems that an inflow of such personnel to the higher echelons of power remains limited.
However, it would not pay off to take a pessimistic view on Russia in the coming years. The government’s financial position has a significant degree of durability, due to large reserves both at the government’s rainy-day fund and the Central Bank’s currency reserves, making the risks of fallout from the global credit crunch manageable. Commodity prices do not show any signs of weakening and will thus remain to be a considerable driver of economic growth. Domestic investment in fixed assets is growing and interest from foreign investors, both portfolio and strategic, is not waning. Government sponsored investment in infrastructure is also gradually taking off. The momentum for growth is there, and for all their objective limitations, Putin/Medvedev’s team will keep it going.
Ukraine: The power struggle continues; PM threatens coalition break
The political fight at the helm of the power continues to be the main theme in Ukraine, and this is now starting to affect the country’s economic development.
From the very beginning of the year, President Victor Yuschenko persistently opposed all the moves of Prime Minister Yulia Tymoshenko, who was supposed to be his closest ally in the ruling coalition. As a matter of fact practically all the major moves of the government, whether it was attempts to rectify the gas supply issues, or appointment of a new head of the State Property Fund, or even setting the annual privatization program, were immediately cancelled by a presidential decree.
The continuing standoff has practically paralyzed the work of the government, therefore Prime Minister Yulia Tymoshenko started an offensive in response. First, her political supporters in the Rada (the parliament) drafted a set of constitutional changes, which could substantially reduce the presidential powers and increase the responsibilities of the Cabinet. The cabinet are now ready to submit these proposals for review by the Constitutional Court. Remarkably, the opposition Party of Regions (led by ex-Prime Minister and presidential contender Victor Yanukovich) also prepared a draft of constitutional changes aiming for a similar outcome.
The two drives to amend the constitution, although not yet coordinated and evidently pursuing conflicting goals, are posing a real threat to the President’s future, because the two factions of the parliament combined could easily provide the over 300 votes needed for constitutional change, in case one of the sides finally supports the initiatives of the other. So, the re-incarnation of the Orange Coalition could again become a victim of the maneuvering within the political triangle, however this time we could see the new combination of Tymoshenko and Yanukovich, rather than of Yuschenko and Yanukovich, as was previously the case.
The only plausible defense the President could have in case this combination becomes probable is to block the work of the Constitutional Court, for example by dismissing a third of the judges drafted on the presidential quota. However, currently it looks like both President Yuschenko and Prime Minister Tymoshenko are on track to raise the level of the conflict to the formal dissolution of the majority coalition, which could trigger the resignation of the Cabinet and potential new extraordinary parliamentary elections.
Continuing political instability in the country year and a half before the next scheduled Presidential elections do not leave the authorities a chance to address urgent economic issues, including funding the state budget and/or fighting inflationary pressures. On the back of growing energy and food prices, inflation rose to 30% YoY (year-on-year) in April 2008, currently the highest in Europe. Food inflation jumped to almost 50% YoY, with other prices growing quickly as well, most significantly wages, which are up by almost 40% YoY, to some extent a result of the Cabinet’s populist policies.
Another alarming macroeconomic development is the continuing widening of the current account, which so far was covered by a surplus of the capital account. There have been inflows of capital of close to 26% of GDP in Ukraine in 2007, however a repetition of such inflows in 2008 is unlikely, given that the political situation has become messier.
The deterioration of the macroeconomic situation in Ukraine needs immediate attention of the authorities and the fact that the President and the Prime Ministers are currently at loggerheads in pursuing their own political agendas is not promising for improved economic developments in the country in the foreseeable future.
Vostok Nafta’s portfolio development
Vostok Nafta's net asset value/share increased by 20.04% during January 1, 2008 and March 31, 2008 compared to the RTS index decrease of 10.37% in USD terms.
(For full report see attached file.)
