Page 73 - IFR Opportunities in Russian capital markets

CHAPTER03
ifrintelligence reports/Opportunities in: Russian Capital Markets
Figure 3.13: Russian stock movements, Jan - Feb 2007 (%)
Irkutskenergo (IRGZ) AO MOSENERGO (MSNG) Wholesale Generation Company -3 (Republic of Buryatia) (OGKC) Severstal (CHMF) NMLK (NLMK) NORILSK NICKEL (GMKN) RAO UES (EESR) Polyus Gold (PLZL) Mobile TeleSystems (MTSS) Baltika Brewery (PKBA) Rostelecom (RTKM) Savings bank of the Russian Federation (Sberbank) (SBER) RTS Index Rosneft (ROSN) Sibneft-Omskoilproduct (SIBN)
49.7
Tatneft (Republic of Tatarstan) (TATN) Gazprom (GAZP) LUKOIL (LKOH) Novatek (NVTK) Surgutneftegas (Common Stock) (SNGS)
26.4 25.3
22.1 21.3
18.8 15.7
11.8
11.4 8.7
7.6
7.0 0.6
–1.4 –2.2 –2.6
–6.6 –8.5
–11.5 –17.3
Source: Bloomberg
Surgutneftegas (Preferred Stock) (SNGSP) –22.3
–30 –20 –10 0 10 20 30 40 50 60
%
Domestic investment – the new market driver
Oil and consumer spending are well established as economic drivers, but the new vector in the Russian economy this year is domestic fixed investment.
Domestic investment was gathering a head of steam in 2003, but the Yukos affair effectively stopped it short as oligarchs cancelled investment programmes while they waited to see if they would hang onto their assets.
Now the brouhaha of the crushing of Yukos is almost over, investment is poised to be the factor that allows Russia's economy to surprise on the upside once again.
Investment growth
Fixed investment in 2006 was 18% of GDP, against the median 26.5% for the 10 new members of the EU, which is "sufficient for moderate growth but too small to expect successful diversification away from fuels and metals in the near future," according to Renaissance Capital. The World Bank recommends emerging market economies to maintain an investment rate of at least 20% of GDP to sustain growth and of over 25% to facilitate fast growth and diversification.
However, investment was accelerating by the end of 2006 and there is a wide consensus among investment banks and government officials that 2007 will see an investment boom.
"Investment growth has been volatile in the past, but the current recovery appears more firmly based, reflecting rising public investment, strong private sector balance sheets, easier access to financing from capital inflows and bank credit growth, tightening capacity utilisation and good growth prospects. Growth in 2006 was also supported by government measures such as profit tax depreciation allowance changes, VAT reimbursements and lower import duties. The new law on special economic zones could also provide a fillip", Fitch said in a report in December 2006.
Most of Russia's investment banks point to the rapid progress being made by Russian banks and the fact that many of Russia's companies are approaching full capacity utilisation as an indication that the economy will enjoy an investment boom this year that will accelerate growth.
UBS said: "In many ways 2007 looks set to be very similar to the past few years... However, in one important sense next year will be somewhat different: 2007 will be the year in which domestic investment was seen to have taken off and, probably, as an extended period when strong, investment-led growth commenced."
"What makes us confident of this? Capacity constraints are being hit in all sectors; both domestic and international funds are readily available; asset prices are no longer dirt cheap, so gains must come from growth; and confidence is abundant. We conclude that Russia is on the threshold of a construction and investment boom."
66