Page 64 - IFR Opportunities in Russian capital markets

CHAPTER03
ifrintelligence reports/Opportunities in: Russian Capital Markets
Liquidity
The lack of institutional investors and the speculative, short-term mentality of most of the domestic investors mean Russia’s stock market remains very sensitive to liquidity in the financial system. In turn the liquidity is dependent on the price of oil, the strength of the ruble's apprecia- tion and the tax schedule, among other things.
The leading role of banks among the domestic investors also makes the RTS more dependent on liquidity flows. In Figure 3.7 the rise of the RTS follows the rise in money supply, which is being fuelled by incoming petrodollars. However, the relation breaks in 2004 during the mini-bank crisis, when the interbank market collapsed and smaller banks suddenly experienced a sharp liquidity squeeze. The market was further unsettled in that year by an escalation of the Yukos affair, but once these nerves passed the market quickly caught up with money supply in 2005.
Figure 3.7: Money supply vs equities, 2000–07
RUR per US$1 2,500
2,000 1,500 1,000
Money supply RTS Index
Inflation, % 400
350 300 250 200 150 100 50
500 00
Source: DataStream
"We saw through 2006 that when liquidity conditions tighten in Russia, the rising cost of borrowing slows market activity and generally hurts prices as traders are forced to close positions. The major driver of liquidity in 2007 will be budget revenues based on oil flows and the Finance Ministry's actions to balance sanitising flows to the Stabilisation Fund and increase the monetary base", says Alfa Bank.
Oil prices
A sudden fall in oil prices is widely seen as the biggest stumbling block for the Russian economy, as the equity market and the price of oil are clearly linked – a correlation demonstrated in Figure 3.8.
Figure 3.8: Equities vs oil prices, 2003-07
2,500 RTS index 90 Brent crude US$ 80
2,000 1,500 1,000
500 0
70 60 50 40 30 20 10 0
Source: DataStream
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