The rebound in the international price of oil and the decline in the value of the rouble have helped Russian stock markets to stage an apparently strong bounce from their precipitous drop of 2008. The recovery, though, is less striking in relative terms and is doing little to assuage concerns about the ability of the country's large companies to pay billlions of dollars of debt coming due this year.
The dollar-denominated RTS Index has moved from 559 to 635 in the last two days, and the rouble-denominated MICEX from 672 to 750. Even so, the former remains within the trading range that I defined six weeks ago (see Rouble teeters on slippery slope, 29 January 2009), although the latter does not.
The RTS, despite being up 27.5% from its low of 498 on this past January 23, is still down 74.5% from its 2,488 high of 19 May 2008. The analogous MICEX numbers are that the index is up 46.2% from its low at 513 of last October 24, but still down 71.7% its 1,956 high from, also from last May 19. (See: Georgia invasion worsens Russian downturn, 22 August 2008, and Russian equity flight accelerates, 11 September 2008).
The fall in the value of the rouble has also helped to make the Russian stock market more interesting to investors. This is likely the short-term bounce that international investment advisors had been looking for. The foreseeable decline in corporate profits, however, foretells increased pressure on equities in the medium-term future, particularly since Russia is vulnerable to international market sentiment.
The recovery in the price of oil is also partly responsible for the up-tick in Russian stock prices, as the Russian market tends by and large to move with the price of oil as well with international equity markets. In recent months, large moves both positive and negative in the two principal indices have become common. The international price of crude oil, which tumbled from a record last July of US$147.27 a barrel to as low as $32.40 in December, has recovered to above $45.
Yet the decline in Russian equities in 2008 was due not only to the declining price of oil but also to the fear of increasing corporate defaults, significant earnings weakness, a general global tendency towards foreign institutional investor capital outflows from emerging markets, and concerns about political risk.
Foreign investors hold, or rather held, about half of the free float in the Russian markets. There are very few long-term institutional investors, foreign or domestic, such as pension funds or mutual funds, and most investors are focused on the short term, which increases market sensitivity to exogenous forces and vulnerability to sharp corrections.
In this connection, it is worth noting that February was the first month since last August during which the Russian Central Bank bought foreign currency rather than selling it, although the purchases were modest at less than US$900 million and 99 million euros (US$125 million). After the rouble's trading range had been enlarged at the end of January to the limit of 41 to the unit basket (comprising 55% dollar-weight and 45% euro-weight) on the down side, in February it fluctuated between 39 and 41 and has continued in this range in March.
Meanwhile, the Financial Times noted late last month that "Western bankers are increasingly anxious about Russian companies' ability to repay $500 billion in foreign corporate debt." Russian banks and corporations have debts falling due this year of approximately $128 billion, but the state is unwilling to use its hard-currency reserves to pull their chestnuts out of the fire, given other drains on the funds, not least the recent support for the rouble but also the need to support the budget. The central banks' reserves have tumbled to under $400 billion in early February from nearly $600 billion last August.
Mergers and acquisitions have been bruited in which the state may play a facilitating but not a driving role, although the mining sector cannot survive in its present form without state support. Into which entities existing companies are merged, under what conditions, and with which executive leadership, will be as much a series of political as economic decisions. Oleg Deripaska's Rusal, perhaps the most heavily indebted Russian company with total debts of about $17 billion, of which $7 billion to foreign creditors, for example, is clearly being targeted by Deputy Prime Minister Igor Sechin.
Through this channel of economics, finance, and the restructuring of major industrial sectors, the crisis in the economic and financial sphere is likely to be translated into the emerging political rift between President Dmitry Medvedev and Prime Minister Vladimir Putin. Some consolidation in Russian industry is unavoidable. Whether the resulting firms are run by the siloviki (state-security veterans) around Putin or by the managerial rationalists around Medvedev will tell us a great deal about the future course of the relations between the two members of the ruling duumvirate.
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URL: http://www.robertcutler.org/blog/2009/03/russia_recovery_not_yet_enough.html
First published in Asia Times Online, 12 March 2009.
