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The All Russia Research Team

For Russian analysts, surprising political stability and an oil-fueled economic boom mean that Kremlinology counts less -- and stock analysis skills mean more.

To see the complete rankings please click here.
Current subscribers, please click here. Renaissance Capital's consumer sector analyst and deputy research head Natalya Zagvozdina needs a clone. Badly.

In April, Moscow-based Zagvozdina was helping Renaissance's sales team prepare for seven initial public offerings of Russian companies. At the same time, she was covering a half dozen consumer stocks that had come to market over the past year -- increasing her coverage universe to 12 companies -- and educating herself on nine other businesses on which she plans to initiate coverage by September.

"We have been looking actively for a second consumer analyst since December," she says, diving into a fresh stack of documents at 6:30 on one recent spring evening. "But with the global banks here hiring now, competition for people with experience has gotten very intense."

Zagvozdina's harried pace and the scramble among banks to find seasoned analysts are both emblematic of Russia's equities boom. After an anxious first half of 2005, when investors fretted over the possibility of corporate renationalizations and the sustainability of oil prices that topped $40 a barrel, Russian stocks took off. Concluding that President Vladimir Putin, whose second and final term ends in March 2008, will be, on balance, a benign steward of the economy and that oil prices will remain high, investors have poured into the Moscow market, contributing to an 83.3 percent gain in the bellwether Russian Trading System index in 2005 and, even after a recent setback, a 32.4 percent rise this year through mid-May.

"The biggest challenge we face is managing growth," notes Alexander Burgansky, head of equity research at Renaissance, whose 40-analyst staff is Moscow's biggest.

That investment in expertise has once again paid off for the firm. In 2006, for a third consecutive year, Renaissance leads its competitors in Institutional Investor's All-Russia Research Team, capturing 14 team positions, as it did in 2005. Returning to second place and maintaining its ten team positions is Troika Dialog; Deutsche UFG, which gains two team positions, for a total of eight, returns to third. Losing one team position and slipping to fourth from a tie for third is UBS. New to the rankings: Moscow-based Trust Investment Bank, a leading fixed-income underwriter, which nabs fifth place with four team positions.

This year's environment has rocked, if not upended, the truisms that Russian analysts have lived by since an indigenous stock market began to sprout 12 years ago. First, Russia is no longer cheap: From oil producers to supermarkets, companies are trading at price-earnings multiples above those of Western blue chips; and the P/Es of cooler sectors, such as metals, have pulled even with those of their emerging-markets peers.

Second, investment in Russia is less dominated by politics than ever before. Western governments may fret over Putin's actions 18 months ago concerning oil company Yukos and its leader, Mikhail Khodorkovsky, or last winter's cutoff of natural gas to Ukraine and its reverberating economic impact, but investors are focusing on seven straight years of real annualized Russian GDP growth in the 6 percent vicinity, fat fiscal surpluses and inflation in the low single digits -- not to mention high oil prices.

Third, before the May downturn, Russian stocks were becoming less inclined to rise and fall in lockstep, putting far more onus on analysts to get individual stocks right. For instance, even as the broad Russian market posted a healthy gain through mid-May, shares of leading cell phone provider Mobile TeleSystems slipped 11.5 percent.

"Russia is becoming much less a world unto its own and much more normal," confirms Moscow-based Alasdair Breach, who ranks No. 2 in Equity Strategy and No. 3 in Economics, and serves as co-head of research at UBS with London-based Vladimir Postolovsky, who is No. 3 in Telecommunications. "One consequence is that research is becoming less about across-the-board Russian risk and much more about stock-price calls."

For equity investors, Russia's halting but determined progress toward a more developed, Western-style economy with more consumer choices will bring new opportunities. Brokerages will pick winners and losers based on different interpretations of how the Russian economy will evolve. Fortunately, investors and analysts get to base their decisions on better information than before, thanks to Russian companies' listings on markets that demand disclosure, such as the London Stock Exchange. Telecom-to-technology conglomerate Sistema and steel manufacturer Evraz were among the big businesses that produced three years of international-standard financial accounts to fulfill the requirements of their 2005 IPOs on the LSE, which now hosts 11 Russian companies. But even in Moscow financial data about companies is no longer treated as a Soviet-era state secret. Oleg Vyugin, director since 2002 of the Federal Service for Financial Markets, has quietly pushed reforms with Putin's blessing. Russian issuers must produce quarterly financials and other investor-friendly materials, such as management assessments of a company's business prospects.

"Although the reports come out two or three months after a quarter ends, not in 20 or 30 days as in America, the companies are trying to improve, and the general atmosphere is becoming more like that in developed markets," says Lauri Sillantaka, the No. 2-ranked Utilities analyst and chief of research at Troika in Moscow.

Not that Russia has entirely stopped being Russia. "Our watchwords for this market are, 'It's the oil price, stupid!'" says UBS's Breach. "And it doesn't make a blind bit of difference for Russia if oil drops to $50 a barrel or to the mid-$40s, because the government takes almost all the revenue above that level and puts it in a stabilization fund." (Finance Minister Alexei Kudrin has so far jealously guarded this state piggy bank, now worth $60 billion, for future rainy days.)

But even in a country where oil-and-gas production accounts for roughly 20 percent of GDP and petroleum companies represent most of the capitalization of the key stock index, experienced fund managers increasingly scrutinize the Russian market as a collection of parts.

"There are whole new sectors on the market and so many different ways to play it now," says Paul Collison, former chief oil analyst at UBS, who joined San Francisco-based Farallon Capital Management in June 2005 as an analyst.

Analysts are responding with an array of strategies. Says Renaissance's Burgansky: "The market is splitting in two. One half is either owned or regulated by the state, and the other is what you might call free-market stocks." At the moment, he much prefers the free sectors like consumer and metals, which he figures will rise again eventually with price increases worldwide.

"We are steering clear of government-run companies like Gazprom and UES," Burgansky adds. "Investors see the government implementing market reforms to add value, but we don't believe the government will."

Breach takes almost exactly the opposite view, predicting policy shifts that will make the state-owned megastocks market leaders. "We think regulated domestic gas prices will be allowed to rise by more than is priced in, so Gazprom has still got a way to run," he says. "We like UES because, one way or another, the utility sector needs investment, so the government will have to let rates rise enough to make it profitable."

Troika's Sillantaka sees value in stocks that investors have neglected. These include many low-liquidity, second-tier companies in such subsectors as auto manufacturing and specialty chemicals. An additional overlooked subsector is power production, Sillantaka's specialty. "Russian utility stocks continue to be undervalued relative to other emerging markets' because Russia is in the midst of a very complicated electricity reform that no one has the time to understand," he says.

The divergent research calls in part reflect the market niches occupied by the four investment banks that have held sway over Russian finance in the pioneering period now coming to an end. Renaissance and Troika remain independent, and Brunswick and United Financial Group have been acquired by global banks -- UBS and Deutsche Bank, respectively. The Swiss and German banks focus on Russian shares that have enough liquidity to accommodate their big international investors. They face new competition from Citigroup, Credit Suisse and Morgan Stanley, which are expanding their Russian presences to capitalize on the IPO boom and, in varying degrees, adding brokerage capacity.

On the research side Citi poached award-winning banking analyst Dmitry Vinogradov from UBS in April 2005 to start its Moscow research operation. Four analysts work for him, and he expects that number to grow to ten over the next few years.

Among the independents, Troika -- controlled by Russian entrepreneur Ruben Vardanyan -- is seeking a role at the frontiers of the market and pitching to money managers interested in a wider range of companies. "We are putting a lot more focus on the second tier, covering 240 companies with fair values," Sillantaka says. "Our clientele is concentrated in the Russia-dedicated funds, and quite a few are hedge fund investors."

Aton Capital, another independent Russian-owned investment firm, has been nipping at Troika's heels, tying for sixth in this year's analyst ranking. But tough new competition is rising from Russia's leading commercial banks, particularly MDM Bank, which last June hired former Renaissance deputy research director Kim Iskyan to form a new department. "Management decided they were sufficiently successful in translating their banking relationships into debt underwriting to set up an equity product," says Iskyan, who has hired top lieutenants from UBS and Credit Suisse. "Our goal is to become the No. 1 investment bank in companies with under $1 billion market cap and in share issues of under $300 million -- the space that is too small to attract interest from bulge-bracket firms."

The Moscow player trying hardest to be all things to all investors is Renaissance, whose majority shareholder and CEO is New Zealand-born Stephen Jennings, one of the bank's five original partners. Its sweep of the research rankings suggests the strategy is working. "Renaissance is the only local house that can compete directly with the international players for business; at the same time, they are doing the second tier and retail better than anyone," says Thomas Adshead, research director at Moscow brokerage Metropol.

Now, the firm just needs to find another consumer analyst like its No. 1-ranked Zagvozdina.

To see the complete rankings please click here.
Current subscribers, please click here.

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