Russia Profile
www.russiaprofile.org
March 16, 2007
Going Where the Wind Blows
Despite the Correction, Russian Stocks Not a Bad Investment
Comment by Vlad Ivanenko
Russia may seem to be full of uncertainty, which is at least the dominant view presented by the Western media, but many foreign investors are increasingly lured by the appeal of its surging equity market. Since President Vladimir Putin came to power in 2000, the RTS Index (RTSI), which is an index of 50 companies that trade on the RTS Stock Exchange in Moscow, has grown more than fourfold. When Sberbank, a leading state-controlled Russian bank, advertised its new share offering designed for small (and unsophisticated) investors last month, it did not need to run an expensive campaign to attract customers. It sufficed to show the graph of its share value growth: a client who happened to invest $10,000 in 2000 would have been a millionaire in 2007. Needless to say, the issue was over-signed in hurry.
Russia may be full of millionaires if the money wind continues to blow in the same direction. Russia is a busy place these days with the construction sector, supposedly the most reliable indicator of long-term commercial activity, booming. Nor are there any signs of a weakening foreign trade balance as resource prices, which define the value of Russian exports, continue to stay above their historical averages. Solid economic fundamentals are complemented with growing expectation of political stability after Putin leaves office in 2008.
However, what comes easily can be lost easily. Financial wealth is dependent on expectations of future returns, but the latter is a human trait that rejects the logic of economic formulas. After reaching its highest point on Feb. 26, the RTSI lost more than 10 percent during the next two weeks. Even after recovering some ground in the last few days, the market is still jittery and may go either way, depending on factors that have nothing to do with Russia.
Different xplanations of the fall in the Russian stock exchange abound, but which comes closest to the truth is unlikely to be revealed any time soon. The globalization of financial markets is definitely a factor. The trouble started when China experienced a fall, which it blamed on technical matters, but then spread throughout the world. Russia might have become a collateral victim of financial panic. The Chinese correction pushed foreign investors to convert their foreign-held financial wealth, especially in “speculative” areas (including Russia), into less profitable and less volatile cash. In this case, as the panic subsides, the investors discover that more adventurous players are earning hefty profits while they wait on the sidelines, and so rush back to the market.
Another account warns of more serious consequences to come. The global financial system is currently unstable as its main supportive structure, the U.S. financial markets, becomes increasingly fragile. The United States continues to run a double – fiscal and trade – deficit with no signs of abatement. At the moment, top U.S. creditors are Asian and oil-producing countries, who are happy to re-invest financial surpluses in American treasury bonds and other securities, such as real estate. Yet, large investors understand that this game of musical chairs should stop sooner or later. To save their capital, they have to move out of U.S.-denominated assets faster than the rest of the group does.
And what about Russia? Russia may have a lot of internal problems and it gets (somewhat deservingly) poor publicity abroad. However, it is relative performance that matters. While seeming paradoxical at first sight, it can be that in a world full of uncertainty Russia looks increasingly like a safe haven where investors can hide from global worries. In this case, the current RTS correction becomes a reliability test for such a haven.