07 October 2003 15:28
Equities: It`s an equitable life, Ivan
Returns on tumultuous Russian equities have continued to outstrip most other stock markets, even as global sentiment
on prospects for an economic upturn has turned more optimistic.
But there is concern that the dominance of the oil and gas sectors is increasing, posing a risk to equity valuations,
should world prices for the commodity fall significantly.
Compared with Russian corporate bonds, the stock market remains worryingly skewed toward the export-driven oil and
gas suppliers, and initial public offerings have been conspicuous by their absence.
"The government has been unable to push through economic reforms as fast as it would have liked, and there has
been little growth outside the commodities sectors," says Chris Weafer, chief strategist at Alfa Bank, one of
Russia's leading commercial banks.
"We need a strong flow of initial public offerings [IPOs] from the manufacturing, consumer and services
industries if Russia is to establish itself as a more diversified, more balanced economy."
Chief among the reforms called for by investors is the reorganisation of Russia's banking system. With the
country's banks currently contributing little to investment or consumer spending, analysts fear economic growth
will be stifled when oil prices turn lower.
For the moment, they remain well above long-term averages, which has made Moscow like a boom town.
As much as 70 per cent of the Russian stock market's capitalisation is made up of oil and gas shares, and this
proportion is increasing.
The RTS1 index, the Russian equity benchmark, had in the year to September gained 65 per cent, roughly double the
increase for emerging market equities on average. Russian stocks have also fared well compared with US markets,
outperforming the S&P 500 by almost three times.
The four years of mouth-watering gains have pushed the Russian market to exceed its pre-crisis peak of 572, and last
week it reached 594.26. Given abundant liquidity in the Russian financial markets, the RTS1 could make further gains, as
long as export revenues continue to flood into the system at current rates.
There are emerging signs that the feel-good factor from oil and gas export revenues is trickling to other areas of
the economy.
This has triggered sharp rises for shares in operators of mobile telecommunications, currently the best performing
sector.
Gains for select stocks remain dazzling. American Depositary Receipts, or US-listed shares, in Golden Telecom and
Vimpelkom have soared 135 per cent over the past year as Russians have flocked to equip themselves with mobile
phones.
But perhaps the best illustration of the dramatic turnround in Russian stocks is Yukos, the oil company. Having been
shunned for blatant violations of minority shareholder rights in the late-1990s, Yukos has become the market's
biggest stock by capitalisation. The company has achieved this through cleaning up its corporate governance and adopting
Western production methods to increase production.
As a result, the shares have risen nearly eight-fold in the past three years. However, what appeared to be a
politically motivated campaign against leading shareholders, mounted by elements of the Kremlin, sent the prices lower
over the past summer.
After Platon Lebedev, a key shareholder in Yukos, was arrested in July and charged with theft in a privatisation
deal, the stock market lost a fifth of its value in two weeks. The worry was that after staying out of business
President Vladimir Putin's administration was becoming nervous about the increasing influence of some of the
country's most powerful oligarchs.
Stocks have since recovered, thanks to a view that the row centres around Mikhail Khodorkovsky, the principal owner
of Yukos, and does not signify a wider campaign against Russia's industrialists. This perception gained precedence
after the anti-monopoly commission approved the planned merger of Yukos with smaller rival Sibneft, a move that will
create the world's fourth-biggest oil producer.
Although the dust appears to have settled, the Yukos affair shows that five years after Russia's financial
crisis, prices remain vulnerable to political risk.
The potential for further market volatility is heightened ahead of December's parliamentary elections and the
presidential poll in March.
Nevertheless, international investors remain on the whole optimistic about medium-term prospects for Russian
equities.
These hopes gained ground in February when BP, the UK-listed oil major, announced a $6.75bn venture to form a new oil
producer with Tyumen Oil Company (TNK).
The market's thinking was that if BP, which had previously lost to TNK in a battle over the oil major's
Russian assets, was allying with its one-time enemy, the country's investment climate must have improved
materially.
Much of the credit for this is given to President Putin's drive for more stable politics, which has created the
conditions for longer-term thinking in business.
"What has changed is that companies are now geared to making a profit," says Jerome Booth, head of research
at Ashomore Investment Management, a UK-based fund manager.
"Under Yeltsin, that was not the objective - it was asset-stripping."
[DFT [FT.com Intraday Feed]] |
RUSSIA IN FACTS
