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Russian stocks hit 5 1/2 year highs

MOSCOW, June 16 (Reuters) - Russia's benchmark stock index gained more than four percent to close at 5-1/2 year highs on Monday after a debt market rally spread to shares and leading blue chips such as oil firm YUKOS were in demand.

The rally, which saw the RTS index close up 4.41 percent at 485.33, was fuelled by pent-up local demand following a bank holiday on Thursday and Friday, when Russian blue chips and Eurobonds rallied in London.

"Our bonds have added to the optimism, but in every paper there is a story," said Oleg Martynenko of Alfa-Bank domestic sales.

Russia's benchmark 2030 bond broke the psychologically important par level last week, its highest since its launch as part of a debt restructuring in 2000.

The 2030 bond was at 101.480 at 1404 GMT, up 0.73 points on the session, as Russians caught up with last week's gains.

Russia's public finances collapsed in 1998, destroying the international market for its debt and stocks as foreign investors fled.

But with oil export money flooding in thanks to soaring oil prices ahead of the war in Iraq, Russian assets reached lofty heights this year. Russia is the world's second largest oil exporter.

"If you look at Russian debt, you probably would ask why the RTS is not at 500," said the head trader at a Russia-dedicated fund. "You have flying bond prices...which are benefiting greatly from Russian liquidity. It's a reaction to Russian debt."

Foreign investors joined in the buying spree and while the Russia-30 Eurobond broke through par, key blue chips -- YUKOS and metals giant Norilsk Nickel , saw strong gains last week that were extended on Monday.

YUKOS closed up 6.4 percent at $12.87, while Norilsk Nickel advanced eight percent to $33.50.

Traders and investors said Norilsk was up on expectations a key acquisition will get the green light on Monday, while YUKOS extended gains on hints of an extra dividend.

"For the first time since August 1998 the RTS has broken above our estimate of fair value," Renaissance Capital head of equities Roland Nash said.

"Our estimate was 480. We are entering a new era of valuation."

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