Stocks Roaring Despite Jitters

After the virtual nonevent of the State Duma elections, it was back to business last week as Russian markets ticked up on the back of a flurry of deals and relief over gas price reform.

Casting a shadow over investor sentiment, however, was the high-profile infighting in the Sergei Storchak affair.

The RTS and MICEX followed an upward trend in the United States, where the government's mortgage plan on Thursday lifted stocks and eased fears that the U.S. economy could slip into recession.

The RTS gained 3 percent to end the week at 2285.85 points, just 2.5 points off its previous high, while MICEX was up 3.4 percent at 1913.38 points, just 4 points off its Nov. 8 all-time high. The country also experienced net fund inflows of $343 million in the week to Wednesday, according to data from EPFR Global.

The dealmaker of the week was state-controlled carmaker AvtoVAZ, whose parent company, state corporation Russian Technologies, picked France's Renault as its strategic partner on Friday. The Tolyatti-based firm's stock soared 23 percent on the week as sentiment strengthened about a deal, particularly after a bid by General Motors was made public Tuesday.

Details on the hookup, which gives Renault a 25 percent stake in AvtoVAZ, remain to be hammered out, but Russian Technologies head Sergei Chemezov said Saturday that the French carmaker had paid "close to the market price" for its stake. With Renault valuing AvtoVAZ at $5.8 billion, that would put a price tag of about $1.5 billion on the deal -- the same figure that Oleg Deripaska paid to take a 20 percent stake in Canada's Magna earlier this year.

Another significant deal last week was the $400 million acquisition of 40 percent of Highland Gold by Roman Abramovich's Millhouse holding. The sale, which sent the London-listed miner's stock up as much as 9.7 percent Tuesday, underlined recent moves to expand across a range of metals by Abramovich and fellow Kremlin-connected oligarchs Deripaska and Alexei Mordashov.

Unlike Deripaska and Mordashov, however, who have clashed this year over control of turbine maker Power Machines, Abramovich appears to have successfully steered clear of any major disputes -- reinforcing his image as the country's teflon oligarch.

The week's biggest relief for investors was the news Tuesday that domestic gas prices would be raised 25 percent to an average of $69 per 1,000 cubic meters in 2008, in line with the government's reform plans. Fears had been mounting that the tariffs hike would be put off until after the presidential election.

The tariffs approval, along with a deal on a gas price hike for Ukraine and the news that the government had declared 31 gas fields "strategic," sent Gazprom stock up 4.6 percent Wednesday, pushing it past Microsoft to become the world's fifth-biggest company by market value.

Analysts saw the stocks rally as primarily gas fired, with Gazprom the main beneficiary. Independent gas producer Novatek also jumped 4.4 percent Wednesday, although it will also have to pay 19 percent more in transportation tariffs next year, another measure approved Tuesday. "It's reassuring for investors to see no backtracking or populism on commitments to reach netback parity on gas prices with Europe by 2011," said James Fenkner, managing partner at Red Star Asset Management. "We see a relief, pre-election rally ... continuing on into the first quarter, on the perception of lower political risk.

"Raising tariffs in an elections year can only happen when those elections aren't really contested," he added.

Gazprom also managed to shrug off a 25 percent fall in second-quarter profits Wednesday, with figures showing that it was having trouble keeping costs under control. Instead, investors focused on the upside of higher prices and demand rising at 20 percent annually.

Clemens Grafe, chief economist at UBS, said investors were "not too interested" in the disappointing figures. "In the long term, the liberalization of prices to netback parity by 2011 is what matters," he said.

While Gazprom enjoyed a surge of 7.8 percent on the week, Rosneft -- where three senior executives left last week, sparking talk of a wider shake-up at the top of the company -- was up a more modest 4 percent.

If the gas price news was a relief for investors, the most worrying was the continued infighting among the Kremlin-connected siloviki, with two parts of the Prosecutor General's Office publicly sparring over the corruption charges against Storchak, one of Finance Minister Alexei Kudrin's deputies.

In a note to investors Thursday, UBS described the recent twists in the Storchak affair as "discomforting."

At the heart of the dispute, analysts say, is likely the intensifying debate about the use of the $144 billion stabilization fund, which Storchak oversaw before his arrest. As of Feb. 1, the fund is to be divided into two -- a "rainy-day" Reserve Fund, which will hedge against a fall in oil prices, and a "spend-now" National Welfare Fund, which will be used to fund infrastructure and other domestic investment projects.

Kudrin has sought to curb domestic spending from the stabilization fund in an effort to prevent inflation from spiraling out of control. Grafe said increased spending from the fund would mean "a big risk" of higher inflation, "but the silver lining is that there isn't going to be South American-style populism here."

The stock market's performance into the first quarter of 2008 "would be anyone's guess, as it could depend on time bombs in the global credit market," Grafe said. "It is not driven by Russian numbers."