Page 48 - IFR Opportunities in Russian capital markets

CHAPTER03
ifrintelligence reports/Opportunities in: Russian Capital Markets
October 1999 to today
In the summer of 1999, the ailing Yeltsin plucked an unknown KGB colonel from obscurity and made him Prime Minister. The man was Vladimir Putin, who came to office just as Chechen terrorists killed more than 300 Russians by blowing up their apartment blocks while they slept. Then in a shock announcement on New Year's Eve Yeltsin resigned, making Putin the acting President. By March of 2000, Putin was installed in the Kremlin as Russia's second ever President.
Putin started his new job with a lot of luck. Oil prices soon recovered to about US$25 and put the budget into profit. But more importantly, devaluation created a fairer value for the ruble and suddenly the economy was awash with cash. Moreover, oil companies found that their domestic costs had been cut to a quarter, while their revenues were rising. The flood of petrodollars primed the pump and in 2000 Russia's economy surprised everyone by growing 10%.
This was the twilight of the oligarch era and it took investors several years to get used to the idea that not only had Russia's economy recovered from the crisis (in about 18 months) but that it was actually now growing strongly and on the path to sustained recovery.
The rise of the RTS was to a large extent driven by historically low interest rates in the rest of the world; unable to earn decent returns elsewhere, investors flooded into emerging markets and Russia had a good story to tell.
The problems in this period were all political. The RTS dived in the summer of 2003, when the Kremlin opened its assault on oil major Yukos – at this time the most valuable company in Russia with a market capitalisation of over US$30bn – with the arrest of deputy chairman Platon Lebedev. The market fell again when Yukos owner Mikhail Khodorkovsky was arrested in October 2004.
Investors were afraid of a pogrom against the remaining oligarchs, but once it failed to appear the index resumed its rapid growth and the RTS nearly doubled in both 2005 and 2006.
The party finally came to an end in May 2006, when fears of interest rates hikes in America ended about eight years of high risk tolerance and a lake of global liquidity.
The RTS still managed to put on a 71% gain in 2006, despite a sell-off in May that wiped 25% of the market's capitalisation in a week, as the Russian growth story had become ever more convincing.
However, investors were reminded of the new global liquidity threats in March 2007 when a sell- off in China sparked another global selling bout. Clearly, the benign conditions of the preceding eight years were over, but at the time of writing it is unclear which will win out: Russia's ongoing growth or the damping effect of the tightening of global liquidity and problems in the industri- alised nations of the world.
Figure 3.3: RTS index, Oct 1999 - May 2007
Index 2,500
2,000
1,500
500
0
Source: RTS
Summary
In the first period described above, the growth of the RTS index was driven by the improving political situation, despite the poor state of the economy, of which investors were reminded on Black Tuesday.
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