First VimpelCom, now MegaFon get hit with tax bill; politics, Central Bank intervention in Brazil

By Reshmi Basu and Paul A. Harris

New York, Dec. 9 - Spreads in Russia widened Thursday as another corporation was hit with a tax bill. Russia's number three mobile operator MegaFon received a $3.57 million bill for back taxes owned from 2001.

On Wednesday, VimpelCom was charged with a $158 million tax bill from 2001, which has dragged down investor confidence because of fears about the Kremlin's interference in business.

In trading Thursday, VimpelCom paper was down two points, according to a buyside source. The source also added that the market is still grasping the news of the tax bill levied against VimpelCom.

"There are two things happening here. One, the amount of the taxes is not that much. It's something that the company can handle," said the source.

Because of the small size of the bill, the market would have been able to shrug off the news. But now that MegaFon has been slapped with a similar tax bill, the market is figuring out what this all means.

"It makes you more worried about the potential of other companies of getting the same treatment," said the buy-side source.

"That being said, at the end of the day, it's just a way in which the state is trying to get companies to pay taxes. You don't want to overreact. But the first reaction is a sell-off."

Spreads for Russia's sovereign bonds were two basis points wider during Thursday's session. The bond due 2030 was down three quarters of a point to 101¾ bid.

"I think it's a problem that will be digested by the market relatively soon - it's a manageable, if high, tax bill [for VimpelCom], and it doesn't necessarily mean that other, similar tax bills are in the works in the short term for other companies," said an emerging market analyst.

"Still, it's another sign that this government has an arbitrary approach to property rights, something that will weigh on confidence in the long-term.

Politics, Central Bank hurt Brazil

Brazilian bonds edged lower on political noise and an intervention by the Central Bank, according to Enrique Alvarez, Latin America debt strategist for think tank IDEAglobal.

"You had some downside in Brazil," Alvarez commented. "There were a couple of factors at work here. The local political spectrum seems to be a little more unstable than it was a couple of days ago."

The executive board of the Brazilian Democratic Party Movement recommended that the party give up its government posts in president Luiz Inacio Lula da Silva's coalition. The party will hold a national convention this weekend in order to get the votes necessary to force their ministers out of the government.

Also, the Central Bank bought dollars for the third time this week, which weakened Brazilian paper. The real also fell as the U.S dollar moved up against the euro for the second day.

"The local currency backing off is taking some steam off the upside in the debt market," said Alvarez.

The Brazil C-bond fell 0.255 to 101.12 bid while the bond due 2040 lost one point to 115.55 bid.

And of course, the weakness in the U.S Treasury market dragged down the overall market in Latin America. The 10-year note tried to go past 4.11% yield, but was unable to do so and is backing off, said Alvarez.

The yield on the 10-year note jumped to 4.17% from Wednesday's 4.13%.

"We're back to the lower end of the mid-range, where we're between 4.16% and 4.17%.

"It points to a somewhat large range in the Treasury market. But nonetheless, it doesn't seem that we're going to see lower rates in the 10-year at least for the medium term.

"You have seen some pullback but that's understandable that people are going to want to take a little profits in light of a slightly less positive environment," he noted.

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