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Russian economy more solidly based than in 1997
By Samantha Shields

MOSCOW, June 19 (Reuters) - Moscow's growing number of smart restaurants and expensive shops, along with a stable currency and a soaring stock market may remind some of the calm before the 1998 storm that felled the rouble and hit investors.

But analysts say this recovery, which took the benchmark stock index to levels unseen since 1997 this week, is built on better fiscal foundations and has strong backing from the steady hand of President Vladimir Putin.

That means it could withstand even a sharp drop in the price of oil, the foundation of the Russian economy, they say.

"In 1998 there was no-one minding the shop, now there is someone with a long-term economic plan," said Chris Weafer, chief strategist at Alfa-Bank.

On August 17 1998, with an ailing President Boris Yeltsin at the helm of the country, Russia's central bank effectively devalued the rouble and froze the domestic debt market.

Before that the rouble had been stabilising, Yeltsin had ruled out the possibility of devaluation and the benchmark Russian Trading System (RTS) index had reached 500, the very level it is hovering below now.

"It may look like the mid-1990s in terms of stability, a strong rouble, consumption and the stock market, but to compare the two situations would be very misleading," said Vladimir Tikhomirov, senior economist at NIKoil.


Forex reserves fluctuated between $12 and $17 billion in the years before the crisis while today they stand at $63.6 billion.

In 1998 the budget was in deficit, but it has now been in surplus for the past three years.

Five years ago fears abounded that Russia would not be able to service its foreign debt. Today it has paid off the biggest tranche, does not need to take out sovereign debt and has a special reserve fund expected to be worth 220 billion roubles ($7.24 billion) by the end of the year.

"The financial reserve matches the amount of debt Russia has to service and so even if oil prices were to completely collapse there would be enough money," said Tikhomirov.

Benchmark Brent crude in London is currently traded at $26.16 per barrel and Russian Urals blend $1.60/$1.40 cheaper. Analyst said a Brent price between $18 and $22 per barrel is optimal for Russia.

Much of the recent liquidity in the RTS has come from cash-rich investors chasing a handful of stocks, flush with oil revenues after crude prices soared ahead of the U.S. invasion of Iraq. Russia is the world's second-largest oil exporter after Saudi Arabia.

Russian companies have also come a long way since they were bought cheaply in the controversial loans-for-shares deals of the 1990s.

The super-rich tycoons, locally known as oligarchs, who grabbed the assets are now eager to become respected international players.

Britain's BP (BP.L) is days from finalising a deal to buy 50 percent of Russia's third biggest oil firm TNK, and metals giant Norilsk Nickel has just bought 51 percent of U.S. platinum and palladium producer Stillwater Mining Co.


Weafer at Alfa-Bank said today's situation represents an alignment of interests in Russia for the first time.

"Back then there was nobody in charge and everybody was busy grabbing assets and building bases for themselves," he said. "Now it is simply good business practice for those companies to support the government."

Better business practice is leading to more capital inflows and hence liquidity, according to Niclas Sundstrom, director and economic political strategist at Citigroup in London.

The factors driving the economy are a virtuous circle of fundamentals.

"That means the good scenario is based on idiosyncratic Russian factors and the country may even be resilient to a global downturn," Sundstrom said. ($1-30.38 Rouble)

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