From: "Ilya Merenzon" <merenzon@prgroup.info>
Subject: The most accurate Russian economic indicator - Vladimir Putin's mood.
Date: Fri, 21 Oct 2005
The Russian economy appears to be growing at an enormous rate. The Dow Jones Russian Titans Index, which monitors large cap Russian companies, is up 69% this year, substantially higher than the roaring Asian indexes (Seoul's Kospi index, for instance, is up only 39% this year to date). But does this mean that the Russian economy has managed to overcome the political, economic, and social turbulence of the nineties and is now entering a period of stability and growth?
The answer is no, or, rather, not necessarily. What the Dow Jones Russian Titans, or RTS, another closely watched Russian Index, which recently passed the 1000 benchmark, shows is the increased demand for Russian companies by the global financial community. This demand could be triggered by a belief that Russian assets are still undervalued, or are searching for alternative destinations for investment, or simply following a new investment fad. But it does not necessarily mean that the country's economy is doing well, or that the country's citizens will all get a piece of the pie.
The Dow Jones Industrial Average, the S&P 500, or other US indexes are all accurate indicators of the US Stock market and are very closely watched because they have a high correlation with investors' actual wealth. It is estimated that some 70% of Americans have some interest in the stock market either directly, or through pension plans or IRAs. There is no reliable comparable data for Russia, but experts agree that less than 3% of Russians own stocks or other investment instruments. At this point the Russian stock market, booming or not, is detached from everyday Russians and lacks important features of its western counterparts, such as the ability to produce a "wealth effect" and an increase in consumer spending.
The Russian stock market is not driven by a multitude of individual investors, whose presence creates "sticky stock prices" and absorbs minor financial fluctuations. It is oligopolistic in nature and is controlled by only a few large corporate players, and therefore, is very volatile.
There is one financial indicator that can almost certainly provide needed insight into the performance of the Russian stock market. This indicator measures the relationship between major Russian corporations and the Kremlin. The power of the Kremlin over the stock market is unparalleled: nearly all components of the RTS Index are either government-controlled, or owned by oligarchs, who are known to have direct ties with the Kremlin.
As of January 2005, Russian stocks grew at a high, almost unprecedented, rate. That means, for one, that president Putin is in a good mood. But that does not necessarily mean bright economic outlook.
Russian people, however, are doing well. Real estate prices, the backbone of national wealth, are skyrocketing, creating millionaires (in US dollars) out of engineers and teachers, who happen to own large apartments in major cities. But, until an open financial system is developed, Kremlin-free, with a corresponding legal and political environment, Russians will continue investing in real estate, or worse stuff money under their mattresses, unable to reap the benefits of increasing stock prices of Russian companies, which they helped build years ago.