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11.10.07
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On A High
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Comment by Ben Aris
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Russian Markets Continue to Soar Despite Political Shakeup
RTS, Russia's leading stock market index, hit a new all-time high on Oct. 1 reaching 2,108 even though the crisis sweeping the international capital markets isn't officially over.
Someone must be wrong. Investors are piling back into Russian equity, which the local investment banks are selling as a safe haven from the shockwaves sweeping the globe after the U.S. subprime credit market went into meltdown over the summer.
Emerging markets have been particularly hard hit, particularly countries like Kazakhstan, which depended heavily on international financing to pay for the astronomical growth of its finance sector. However, Russia's equity market has escaped largely unscathed.
"Whatever else is happing, the fundamental story in Russia is rock solid," says Roland Nash, head of research at Renaissance Capital. "The foreign currency reserves are $416 billion, the economy is generating healthy fiscal and current account surpluses and growth is continuing to accelerate."
The U.S. Federal treasury's decision to slash interest rates on domestic overnight rates by half a percent in October has bolstered markets, but many see the move as a short-term fix, designed to restore confidence rather than fix the problem.
The issue Russia is facing in the short-term is a liquidity squeeze that could cause mayhem in the domestic financial system. While no one argues that the Russian economy is in good health, like any profitable company, it could still go bust if it runs out of cash to pay its bills.
In the last two months, more than $10 billion worth of bond issues have been cancelled due to choppy conditions in the international capital markets. Another $20 billion of bond issues due in the last quarter of this year may also be cancelled.
"That means the liquidty risk is not over. If these bonds are not issued, then Russia will have to come up with $30 billion in cash from somewhere. There is a danger that a bank might go bust, or we will see the first real bond default and that will have wide implications for the financial system," says Nash.
However, there is no consensus on what is happening now. Evgeny Gavrilenko, chief economist with Troika Dialog thinks that there is plenty of liquidity about.
"Money supply grew by half this year and yet we see very little impact on inflation," he says. "Interbank interest rates have grown from 1-3 percent to about 6 percent now, but there is no shortage of money. What there is a shortage of is confidence."
The jury is out on how the rest of the year will play out. The optimists hope that Russia's safe haven status will attract a flood of money that will make up for the shortfall of missing IPOs and bond issues that have been cancelled because of poor market conditions.
Ironically the upcoming Duma and presidential elections will make less of an impact on the stock market than a few missing bond issues.
Here is where the disconnection between the press coverage of Russia and perception investors have of the country is most remarkable. While President Vladimir Putin's announcement that he may become prime minister next year grabbed headlines around the world, it barely caused a blip on the RTS.
Investors - like the Russian voters - would be more than happy to see more of the same. They are quite happy with Putin’s plan, since it is delivering solid growth.
As the most unloved of the BRIC emerging markets, Russia has attracted the least amount of portfolio investment, with the lion's share invested into China and India. However, analysts in Russia hope that as the returns in these other markets start to slow, while Russia continues to roar, these investors will start to switch out of other markets and into Russia. And this could start happening as soon as next year, once the presidential elections are past. |
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