Page 76 - IFR Opportunities in Russian capital markets

CHAPTER03
ifrintelligence reports/Opportunities in: Russian Capital Markets
State investment programmes
Since the fall of the Soviet Union the state has played a relatively small role in investment, as it kept spending as low as possible as part of the campaign to bring down inflation. However, the hardest part of the battle to reduce inflation is almost over and 2007 should mark a watershed as the state begins to spend some of the hundreds of billions of dollars of windfall oil revenues.
This money will be pumped into the economy using a variety of means, but the State Investment Fund is the main vehicle, with other investment funds such as the Fund for Future Generations and the state-owned Russian Venture Capital Fund also accounting for significant investment (see Chapter 1) of about US$7bn in 2007.
Apart from these organised programmes to support targeted sectors and goals, the two main state investment projects are targetting power and the army.
Power
The supply and demand of power are evenly matched and Russia desperately needs to build new generation capacity or face blackouts. The state-owned United Energy Systems (UES) utility operator will spend US$118bn over the next five years to build 41GW of new generating capacity.
Defence
After more than a decade of neglect the state has decided to build up its conventional armed forces again, as well as investing into the military-industrial complex. Russia is the second biggest arms exporter after the US and earned a record US$6bn from arms exports in 2006. Altogether, the Kremlin plans to spend a reported US$178bn on equipping the armed forces and investing into arms production over the next five years.
Nuclear
In March the government allocated US$38bn to build more nuclear power stations. Russia currently sports nine nuclear plants, but as part of the Kremlin's grand plan to develop its energy resources it plans to build 40 new nuclear power stations over the next 20 years. The first phase of the programme will run to 2015 and includes increasing nuclear power generation by 50–100%.
Market volatility
The Russian stock market is very volatile. The country has yet to develop domestic institutional investors such as pension funds and insurance companies that invest long-term and provide some stability to prices.
Domestic banks dominate domestic portfolio investments and their desire to hold equities is a function of the liquidity flows in the banking sector, which is itself volatile.
The Russian retail investor has discovered mutual funds, which attracted a record RUB400bn (US$15bn) in 2006. However, few of these investors are putting money away to supplement their pensions and tend to use the funds as a proxy with which to play the market. Leading domestic mutual fund managers say that investors typically invest for six months and redeem their investment if it rises.
Russia scored a hat-trick of investment grades from the main ratings agencies in 2005 which have brought in more big international investors with a longer-term perspective, but the number of them and amount they have committed remains limited. Much of the investment remains fairly speculative and the growing number of hedge funds invested in Russia can also destabilise the market in times of turmoil.
The links between GEMs
The Russian stock market put in almost five years of uninterrupted growth until May 2006 when fears of interest hikes in the US sent the RTS index down by 25% in a week.
The market recovered to finish 2006 up more than 70% but then at the start of March 2007 a sharp 9% sell-off in China sent the markets tanking again: the index fell from its freshly set all-time high of 1,965 on 25 February to just over 1,700 (see Figure 3.15).
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