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Moscow Times
June 3, 2003
Ghost of Crisis Past Haunts Investors
By Valeria Korchagina
Staff Writer

The economy is starting to look too much like it did in 1997, and sluggish progress on structural reforms could result in a repeat of the disastrous default and devaluation of 1998, a leading investment banker warned Monday.

Just like the pre-crisis boom year of 1997, the country is awash in cash, the ruble is str stock market is booming and growth projections are being updated regularly, said Stephen Jennings, the CEO and co-founder of Renaissance Capital. "But many of Russia's deepest structural problems have still not been resolved," he said.

"The ... danger for investors now is that the surge in liquidity we are currently seeing will lead them to downplay those problems," Jennings, a key player in Russia's early privatization process, told an audience of international and domestic investors and influential government and business figures.

Jennings said he was "amazed at the similarities" between current market conditions and those in 1997:

The benchmark RTS index was 470 in August 1997 and is 460 now.

The RTS was up 50 percent in the first five months of 1997 and has already climbed 30 percent year to date.

In 1997, RTS trading volumes more than doubled, as they have this year.

In 1997, new, relatively naive investors rushed into the market. Over the last six months, there has been another influx of newcomers.

In 1997, ratings agencies were tripping over themselves to increase Russia's sovereign rating. Today, Russia is expected to become "investment grade" inside 12 months.

And, Jennings added, just like 1997, "there is grossly inadequate credit differentiation in the corporate debt market."

It wasn't all doom and gloom, however. Before introducing Finance Minister Alexei Kudrin as "the man actually responsible for ensuring the economy continues to sail as smoothly as it has over the last few years," Jennings noted the positive differences between the Russia of today and that of six years ago.

Political stability has been achieved under President Vladimir Putin, property rights are better protected, companies are investing in themselves, the tax system has been improved and simplified, and most of the buying on the domestic market is done by residents, he said.

But corruption, burdensome bureaucracy, government inefficiency and ineptitude and the lack of an efficient banking system all require urgent attention and action, Jennings said.

"The liquidity flows currently driving the re-rating of Russian assets are not sustainable without the reforms I have mentioned and do not provide a sound basis for valuing any asset in the medium term," he said.

These concerns were echoed in part by Kudrin, who said that despite the healthy economic performance, Russia has yet to create a reliable mechanism to protect itself from volatile oil prices.

Kudrin said the government is pushing forward with the creation of a stabilization fund to accumulate excessive revenues from oil sales to help guard against price volatility.

"We don't want to live through another August 1998 crisis," he said.

He singled out the banking sector as a key weakness for the economy, but said it was unlikely to show marked improvement anytime soon -- as currency controls are gradually liberalized, foreign competitors are likely to enter the market, a combination that will be "tough" for Russian banks to deal with.

Central Bank Chairman Sergei Ignatyev, the third speaker at Monday's conference, repeated earlier remarks that currency controls would be lifted only gradually and not completely before 2007.

Any quick movements on currency controls could lead "to a system crisis," he said. Ignatyev, however, said that should a crisis similar to the one in 1998 occur, losses to Russian banks would be considerably smaller. "But that doesn't mean that our banking system is totally stable."

Most banks are reluctant to reform themselves because "they fear competition from foreign banks," he said.

This is why the owners and beneficiaries of banks are reluctant to float shares in their bank on the stock market, Ignatyev said. The reluctance to become transparent is the main reason only one bank in Russia -- state-controlled savings bank Sberbank -- is publicly traded on the market.

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