The Russian economy has moved rapidly ahead in the new millennium. Since 2000 the economy has, on average, grown by 6% y/y, and the latest data releases show growth rates coming close to 8% y/y. There is no doubt that the economic upswing was initiated by rising energy prices, which have occurred since 2002. Higher prices for oil and gas have boosted revenues in the Russian exports sector, which have grown dramatically over the last 5-6 years. This has boosted the Russian trade surplus and had a positive effect on public as well as private finances. The public budget benefited from rising energy prices, largely through direct exports via publicly-owned energy companies and indirectly through higher tax payments coming from export duties on energy products. The private sector obviously also benefited from rising energy prices as earnings went up and unemployment fell significantly. The private sector is currently the strongest driver behind the economic growth in Russia.

The strong surplus in the trade balance means that the external balances in Russia are very strong. This has in turn led to a massive build up in FX reserves, which now are the third largest in the world, supporting the belief in the RUB. The Russian rouble (RUB) is pegged against a dual currency basket of the euro and the dollar. The Russian central bank (CBR) keeps a tight grip on the rouble which, on a daily basis, varies very little against this basket. There is a strong appreciation pressure on the RUB due to the strong external balances and an undervalued currency. CBR uses the exchange rate as a tool for controlling inflation as the Russian money market is not yet very mature. With rising inflationary pressures and the authorities bringing attention to fighting inflation, CBR has over the last years allowed some appreciation in the rouble to dampen inflation. In fact last year the rouble appreciated by 4% against the currency basket. We expect this trend to continue in 2007-2008 as these pressures still exist, although at a slower pace - 2% per year is more likely. The currency risk is fairly low as CBR allows very little variation in the rouble. It should, however, be mentioned that the development in EUR/USD is a risk factor towards a position in the rouble. A weakening dollar means that, all else equal, the rouble will appreciate mostly against the dollar and tend to perform slightly worse against EUR (DKK) - and vice versa. We recommend buying our issue, which is a short-term rouble bond with an 18-months time to maturity. We especially like the short end of the curve to limit interest rate sensitivity and longer-term risks in the Russian economy related to an expected worsening of the external balances looking 4-5 years ahead.

(*) Yield to maturity is calculated the 25. of April 2007