Page 47 - IFR Opportunities in Russian capital markets

CHAPTER03
ifrintelligence reports/Opportunities in: Russian Capital Markets
Figure 3.1: RTS index, Sept 1995 - Oct 1997
700 600 500 400 300 200 100
0
Source: RTS
October 1997 to October 1999
The RTS hit its zenith on 6 October 1997, when the index reached 571.6, after which investors began to loose their nerve.
The problem was with the ruble. As the Central Bank of Russia (CBR) slowly gained control over inflation the exchange started to settle and Russians were encouraged when the exchange rate remained at roughly six rubles to the dollar for most of 1997 – the manifestation of stability in an exchange rate-obsessed society emerging from years of hyper-inflation.
However, the CBR's efforts to keep the ruble inside a slowly falling trading band meant the currency was overvalued and the mispricing of the currency had sucked liquidity out of the system, leading to a massive and ongoing non-payment crisis. With no cash in the economy, the state could not raise taxes, companies had no money for investment and the population was living on IOUs.
The government, struggling to fund a deficit running at 7–8% a year, issued short-term ruble- denominated bonds – the GKOs, paying up to 20% a month at the peak – in an effort to attract money.
And then Russia had some bad luck. Although the economy was in a mess, interest rates on GKOs were falling steadily and reforms were going ahead, albeit slowly. Then a crisis in Asia brought oil prices down to US$10/bbl (per barrel). It was an external shock that the Russian economy was in no position to weather and the weak financial system collapsed, ending with a double whammy of default on domestic debt and devaluation of the ruble on 17 August 1998.
As far as the stock market was concerned, the financial crisis came at the end of the falling stock market, while the beginning of the fall was started by a sell-off in Asia that spread around the world. The RTS reached its nadir on 5 October 1998, when the index dropped to an all time low of 38.5309 (see Figure 3.2).
Figure 3.2: RTS index, Oct 1997 - Oct 1998
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0
Source: RTS
40
6/10/97 6/11/97 6/12/97
1/9/95 1/11/95 1/1/96 1/3/96 6/2/98 1/5/96 6/3/98 1/7/96 1/9/96 1/11/96 1/1/97 1/3/97 1/5/97 1/7/97 1/9/97
6/1/98
6/4/98 6/5/98 6/6/98 6/7/98 6/8/98 6/9/98
6/10/98