U.S. Woes Weigh Heavy on Investors

MTGref offering a toast at the St. Petersburg forum on Saturday, where he warned that the economy was "overheating."
Russian markets slid on the week as investors didn't quite know whether to focus on a strong domestic economy or a flurry of U.S. financial news, while inflation hit its highest rate in 5 1/2 years.

The falls were fueled by rising unemployment in the United States and world leaders' warnings that the oil price could finally tip the global economy into a deep recession, as well as profit-taking that halted the May rally after President Dmitry Medvedev's inauguration and the promise of oil tax breaks.

The week's losses, 5.9 percent on the MICEX Index and 4.8 percent on the RTS Index, were mainly down to two big falls. On Wednesday, the market reacted to worrying U.S. bank figures, and on Saturday — an extra trading day to compensate for next week's Russia Day holiday — the markets fell on the U.S. job figures.

"Nothing was really wrong with the Russia story," said Tom Mundy, an equities strategist at Renaissance Capital. "Investors [were] taking profits after the rally that came on the transition to Medvedev and on the expectation of oil tax cuts."

The profit-taking led to LUKoil's biggest weekly fall this year — 8.6 percent — despite what it called its strongest-ever quarterly numbers, released Wednesday. It was the worst day in four months for LUKoil, falling 6.1 percent, and Rosneft, which lost 4.4 percent. Analysts said they saw investors taking money off the table after the month's sustained rally.

While LUKoil reported revenue up 59 percent year on year, attributable to an 85 percent jump in crude and oil product prices, so were costs — with the government's tax take eating up most of the windfall.

In a note Thursday, Viktor Mishnyakov, oil and gas analyst at UralSib, saw a buying opportunity, with strong potential for growth in key regions such as Timan-Pechora, where the tax cuts would likely encourage exploration.

The international fallout took a toll on Sberbank, which was down 7.9 percent on the week amid a rough ride for global banking stocks.

Power generator OGK-2's problems, however, were very much of the homegrown variety. The stock plummeted 12.8 percent on the week after 16 of the company's executives walked out to cash in on golden-parachute packages totaling $23 million.

The week's biggest rollercoaster ride was gold miner Polyus, which jumped on speculation of a key stake being sold to Mikhail Prokhorov, who owns about 30 percent. The stock then fell back after the deal fell through, ending the week down 6.62 rubles to 1,483.21 rubles.

Meanwhile, the elephant in the room was soaring inflation, which on Wednesday the State Statistics Service put at an annualized 15.1 percent for May.

At the St. Petersburg forum, Sberbank chief German Gref warned that the economy was already "in the process of overheating" and that the government needed to cut spending to stand a chance of curbing inflation by year's end. Liberals have been divided on the cuts, with Gref and Finance Minister Alexei Kudrin as longtime supporters, and Economic Development Minister Elvira Nabiullina predicting that the inflation problem will solve itself.

"The government's message is 'Don't panic, it will be lower by year's end,'" UralSib chief strategist Chris Weafer said in a note last week. "But it is by no means clear how inflation will be lowered in the second half."

Budget cuts and further electricity- and gas-tariff hikes would be politically unacceptable for the Cabinet, while price controls would not work, Weafer said. "This leaves only currency. … The government finds itself increasingly between a rock and a hard place of inflation and currency competitiveness."