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Surgut Pares Best 2012 Gain as Tax Cut Fades: Russia Overnight

OAO Surgutneftegas (SGTPY), the biggest gainer among Russian stocks traded in the U.S. this year, dropped the most since November on speculation the government won’t follow through with a tax cut on the company’s products.

Russia’s fourth-largest oil producer, Surgutneftegas tumbled 5.7 percent in New York yesterday, paring its 37 percent surge in the first quarter, the biggest gain since the first three months of 2009. The Bloomberg Russia-US Equity Index (RUS14BN) of Russian U.S.-listed companies slid 1.8 percent yesterday, while futures expiring in June on Moscow’s RTS Index dropped 0.3 percent to 158,750 in U.S. trading.

Prospects the oil company will boost its dividend has driven gains in the stock, according to Citigroup Inc. Surgutneftegas will pay out 9.3 percent more than it did last year, according to Bloomberg dividend projections, and its 12- month dividend yield is almost double that of OAO Lukoil, the biggest non-state oil producer. A reduction in duties levied on refined oil products, being floated by the Energy Ministry according to a March 26 Interfax report, probably won’t go ahead as the government needs to fund promises from this month’s presidential election, Alfa Bank says.

“This quarter’s momentum is connected to expectations of a higher dividend,” Andrey Gritsenko, who helps manage $350 million in Russian equities as a fund manager at Kapital Asset Management LLC, including Surgutneftegas shares, said by phone from Moscow yesterday. “A decrease in the tax on refined products would have been good for them but it’s unlikely to happen soon. I’m afraid of an increase.”

Double Valuation

American depositary receipts of Surgutneftegas trade for 15.7 times estimated earnings, more than double the average valuation for companies on the Bloomberg Russia-US Equity Index.

The ADRs slid 5.7 percent to $6.96 in New York yesterday, the biggest one-day drop since Nov. 9. The stock traded at a 0.6 percent discount to Surgutneftegas’ Moscow preferred shares, which slipped 4.3 percent to 20.60 rubles, or 70 U.S. cents. One ADR is equal to 10 ordinary shares.

Russia’s Energy Ministry proposed cutting the export duties on crude oil and refined products starting from 2014, the Interfax newswire reported on March 26, citing a letter from Deputy Minister Sergei Kudryashov to the government.

The crude duty would be calculated using a coefficient of 55 percent, down from 60 percent now, and the tax on most refined products would be set at 60 percent of that level, compared with 66 percent now, the news service said on March 26.

‘Main Benefactor’

Surgutneftegas would be the “main benefactor of this system because of the decrease in the tax duty on heavy crude,” Andrey Polischyuk, an analyst at Broker Credit Service in Moscow, said by phone yesterday. “The tax on refined products would drop by about 16 percent.”

The so-called 60-66 tax reform, implemented in October, cut the rate for the export duty to 60 percent, from 65 percent previously, and unified the duty on refined products at 66 percent of that levy. Surgutneftegas didn’t benefit “from this scenario because of its large exports of refined products,” Polischyuk said.

Refined goods make up about 33 percent of Surgutneftegas’ annual crude production, according to Citigroup. In 2011 the company produced 20.1 million tons of refined products, according to its website. Surgutneftegas produced 60.78 million tons of crude oil in 2011, a 2 percent increase from 2010, according to a company statement.

Sales of oil and gas provided almost 50 percent of Russian government revenue last year and make up 17 percent of gross domestic product. The nation is the world’s biggest energy exporter.

‘Too Good to be True’

Implementation of the tax reduction is “too good to be true,” Alfa Bank analysts led by Pavel Sorokin in Moscow wrote in a client note dated March 27. “In order to pass the Energy Ministry’s proposal, the government would need to accept a decrease in tax cash flows.”

Prime Minister Vladimir Putin, who will start his third term as president in May, pledged to boost pensions and support for small businesses during his election campaign. The promises will bolster government spending by as much as 4.8 trillion rubles ($163 billion), or 5 percent of economic output, through 2018, according to estimated by London-based Capital Economics Ltd.

The Market Vectors Russia ETF (RSX) fell 2.9 percent to $30.62 yesterday, the lowest level since Jan. 31. The RTS Volatility Index (RTSVX), which measures expected swings in the index futures, added 2 percent to 34.62.

Norilsk Declines

Crude oil for May delivery declined 1.8 percent to $105.41 a barrel on the New York Mercantile Exchange, the lowest settlement price since March 22, after the U.S. Energy Department said inventories climbed the most in 20 months and as Western nations considered releasing crude from strategic reserves.

Brent oil for May settlement fell 1.1 percent to settle at $124.16 on the London-based ICE Futures Europe exchange. Urals crude, Russia’s chief export blend, lost 1.2 percent to $120.53 yesterday.

OAO GMK Norilsk Nickel (NILSY), the world’s largest producer of nickel and palladium, dropped 1.3 percent to $18.30 in New York yesterday. The stock was trading at a 0.1 percent discount to the company’s Moscow-listed shares. Norilsk (GMKN) fell 0.6 percent to 5,388 rubles, or $183.20, on the Micex Index. One ordinary share is equal to ten depositary receipts.

Norilsk, which is also Russia’s largest mining company, is competing for a license in the Taimyr region, where it was founded, with billionaire Iskandar Makhmudov’s Ural Mining & Metallurgical Co., Interfax reported yesterday. UMMC overtook Norilsk as Russia’s largest copper producer last year.

VimpelCom Djezzy Bounce

The Standard & Poor’s GSCI index of 24 raw materials fell 1.2 percent to 695.61 yesterday. Aluminum, nickel, copper and tin declined in London.

VimpelCom Ltd. (VIP), the world’s sixth-largest wireless operator by subscribers, climbed 2.3 percent to $11.20 in U.S. trading, the biggest one-day advance since March 22.

The Algerian government agreed to pay $6.5 billion to buy 51 percent of the local Djezzy mobile-phone unit from VimpelCom, Reuters reported yesterday, citing an unidentified Finance Ministry official in the North African country.

An adviser to the Algerian finance minister, who declined to be named, had no information about the deal when contacted by Bloomberg News for comment. VimpelCom has a majority stake in Orascom Telecom Holdings SAE, which has been locked in an ownership dispute over Djezzy since early 2010.

‘Removes Downside Risk’

“Our understanding of the Reuters report is that all of Djezzy is valued at $6.5 billion and Algeria agreed to pay half of that for a controlling stake in the company,” Konstantin Chernyshev, head of research at UralSib Financial Corp. in Moscow, said by phone yesterday. “This is positive news for VimpelCom, because the valuation is realistic and it removes downside risk for the company.”

Bobby Leach, a spokesman for Amsterdam-based VimpelCom, declined to comment on the report when contacted by phone in the Dutch city.

Orascom, North Africa’s biggest mobile phone company, said yesterday it plans to appeal a ruling by an Algerian court that fined Djezzy about $1.3 billion for violations of foreign exchange regulations, according to a statement on the company’s website. VimpelCom, which has a mobile-customer base in 20 countries, bought a 51.7 percent stake in Orascom last year.

OAO Rostelecom (ROSYY), Russia’s biggest fixed-line phone provider, slipped 2.6 percent to $29.60 in New York yesterday, the lowest level since March 12. Rostelecom dropped 1 percent to 145.63 rubles, or $4.95, on the Micex. One ADR of Rostelecom is equal to six ordinary shares.

To contact the reporters on this story: Ksenia Galouchko in New York at kgalouchko1@bloomberg.net; Halia Pavliva in New York at hpavliva@bloomberg.net

To contact the editor responsible for this story: Emma O’Brien at eobrien6@bloomberg.net

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