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. Last Updated: 07/27/2016

Market Up 12% On High Oil Prices




The tiny Russian stock market, buoyed by the highest world oil prices in two winters and infected by the same enthusiasm that has driven the mighty Dow Jones above 11,000, soared on Wednesday to a year high.


In the first day of trading since the May holidays, The Moscow Times Index of 50 selected shares jumped 12.03 percent to 77.88. The RTS1-Interfax index, which covers the main over-the-counter trade, jumped 11.65 percent to 102.54 - the first time the RTS has risen above 100 since the August ruble devaluation and treasury bill default.


Never mind that the Dow was in its second day of retreat, falling 100 points in the morning before rallying to close Wednesday at 10,953.70, up 67.59 points. Turnover on the Russian Trading System of $16.32 million was higher than it has been in months, largely thanks to an influx of Western cash.


"We were just catching up with New York," said Samit Yakovlev, a trader with Fleming UCB.


But if the Russian stock market's rise was the most visible news on Wednesday, it was far less relevant to the nation's economic health and future than the robust world oil prices quoted on London's International Petroleum Exchange.


On Tuesday, Brent crude futures closed at $16.93 per barrel, the highest price since December 1997. On Wednesday, Brent slipped to $16.59, which was still far above the low of $9.55 set just a few months ago.


Half of all the hard currency Russia earns comes from the sale abroad of oil and of gas, the price of which is tied to oil. Higher world oil prices mean hundreds of millions of fresh dollars coming to Russia - helping to steady the ruble, which on Wednesday climbed 7 kopeks to 24.09.


It also means healthier government revenues, which could make or break the 1999 federal budget. The 1999 budget, which was drafted back when oil prices were hovering around $10, predicts revenues of about $20 billion. But by some estimates, the budget earns an additional $2 billion for every $1 increase in the price of a barrel of crude.


World oil prices, along with a deal from the International Monetary Fund easing Russia's sovereign debt burden, contributed strongly to Wednesday's optimistic run on the Russian stock market.


The market, which had lain all but dead for months in the wake of August, twitched feebly to life in February on the news that it might receive an injection of cash. The Russian government was offering holders of frozen domestic bonds - such as GKOs, or treasury bills - a token cash payment provided this cash did not leave Russia.


In late March, the government paid Russian holders of treasury bills some 8 billion rubles (about $330 million), and last week foreign holders received another $50 million. In both cases, some of that money - denied access to more lucrative overseas investments - made its way to the sleepy Russian stock market, shaking it awake.


Then this week the Dow Jones industrial average blew past the 11,000 mark Monday - just 24 trading days after it topped 10,000 for the first time, a 10 percent leap that was the quickest of its kind to come during a period of prolonged market strength.


As the week progressed, speculative traders began leaping out of Internet stocks and into a more familiar risk-reward favorite - emerging markets. On Tuesday, for example, Jakarta shot up more than 4.5 percent and Bangkok up 10 percent.


The Russian stock market was closed for the May holidays, and traders were left to watch from the dacha as both the Dow and Brent crude peaked Monday and slipped Tuesday.


On Wednesday, Russia leapt into the fray. Blue-chip oil companies led, with LUKoil surging up 13.27 percent to $10.50 a share and Surgutneftegaz rising 14.45 percent to $0.175.


Even basket case oil companies like Tatneft suddenly looked like roses to optimistic Western traderscaught up in the Dow 11,000 mania.


On Tuesday, Standard & Poor's international rating agency lowered Tatneft's rating to a D for default, after the company failed to pay a Eurobond coupon on time.


On Wednesday, its shares skyrocketed 29.41 percent. Traders - who naturally try to sell the market to journalists, newspaper readers and anyone else who will listen - were insisting that Tatneft was "a bargain" and that other oil majors might hit new historic highs this year.


"There's a chance that LUKoil surges to $30 by year's end," said one of those traders who asked not to be identified - perhaps not surprisingly since he was predicting a 300 percent jump in its value.


Even the optimistic were frank that Russia's stock market rally had little to do with Russia itself.


"I agree that fundamentally nothing much has changed in Russia," said Dmitry Yudin, a London-based emerging markets analyst with Merrill Lynch, reached by telephone.


Christopher Granville, strategist with Flemings UCB, was another who saw Western money following a winding logic of its own from New York to Moscow.


"There is clear evidence of a shift of U.S. mutual funds from U.S. Internet stocks into the emerging markets," Granville said.


"Crucial considerations here are not [Russian] domestic developments," he added. "This rally is underpinned by high oil prices and the IMF program. Should one of these two things fail, this will turn out to be a short-term tally which will be reversed."


Wednesday's excitement was nevertheless a far cry from the market's heyday in 1997, when the MT Index peaked in August at 435.77, and up to $200 million might turn over on a good day.


Analysts were unanimous that the Russian stock market would be volatile throughout the year - buffeted by even the slightest breeze from New York, where the stock market dwarfs Moscow. The market capitalization of the Dow on Wednesday was $2.355 trillion, more than 100 times the MT Index capitalization of $21.7 billion.


But if the Russian market is likely to rise and fall erratically this year, at least it can't crash. Unlike the Dow at 11,000, there's just not much of a height it can fall from.


"Shares are extremely cheap," Yudin said. "The market simply cannot crash from these levels."