Roland Nash of Renaissance Capital -

The big news Thursday hit the market after the close at around 18.30 Moscow time, namely the reshuffle in the government. While the change was rumoured in Moscow (we mentioned the possibility in RenCap's February 5 Morning Monitor), we believe it will likely take the overall market by surprise.

Given that the main headline move was the promotion of the candidate most obviously associated with the siloviki, Sergei Ivanov, and given the rather aggressive statements by President Vladimir Putin recently, the reshuffle is likely to be spun badly in the Western press and may depress the market as Putin's comments appeared to have done earlier this week.

We see any weakness on the back of the reshuffle as a mistake, for two reasons. First, the commonly understood split between the "pro-business" faction in government headed by Dmitri Medvedev and the "pro-siloviki" faction headed by Sergei Ivanov is over simplified to the point of being misleading.

The new first deputy PM

Second, this reshuffle is simply the next stage in what is likely to be a long and drawn-out process leading up to the elections in March 2008. While many will attempt to read something in this latest stirring of the Kremlin tea leaves, we don't think anything useful can be concluded with so much time left before the elections.

The new defence minister will be the current head of the tax service Anatoly Serdukov. While a defence minister drawn from the civilian population will not be popular amongst the military, Serdukov's background in finance is key, given the large sums of money that will be channelled into the defence sector in the upcoming years. Serdukov is associated with the siloviki faction in the government and therefore will be considered a man of the Sechin-Ivanov wing in the government, adding to the sense that the siloviki faction in government has been strengthened.

The biggest promotion was given to Sergei Ivanov, who was elevated to first deputy prime minister. His title now matches that of Dmitry Medvedev. We believe the promotion pushes him away from the problematic Defence Ministry, where his image suffered from the code-red incidents so frequent in the Russian army and quickly aired by the media. He had to handle questions recently relating to the horrific, scandalous leg amputations suffered by a first-year soldier after hazings by second-year soldiers. The new appointment in charge of the booming economy will help Sergei Ivanov develop a cleaner image among voters.

Finally, the promotion of Sergei Naryshkin (formerly Prime Minister Mikhail Fradkov’s chief of staff) to the level of deputy premier from associate is a win for Fradkov, who strengthened his faction in the government. The appointment could also help the unbundling of the state telecom Svyazinvest saga, as he was the man in the government in charge of Svyazinvest’s privatisation or possible reorganisation. This is perhaps why some telecoms were strong Thursday.

Overall, the reshuffle may be taken negatively by the market from a sentimental perspective, but could be positive for defence stocks, telecoms and possibly Rosneft.

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