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. Last Updated: 07/27/2016

Reviving Russian Markets Touted




"We recommend all Russian asset classes. Russia's second attempt at capitalism is only just beginning."


- A Goldman Sachs paper on Russian capital markets published July 23.


Buy Russian securities?


It's true. Nearly a year after the August 1998 terrible troika of devaluation, default and debt moratorium, Russian capital markets are again providing hot returns - particularly to those who rushed to do bottom-fishing last fall.


The stock market this week has cooled, but overall a ruble invested cleverly in January is often just months later worth two, three or more. Consider Unified Energy Systems: At the year's start, a share in the national power company was going for 3 cents. This summer, UES shares have traded higher than 10 cents; Wednesday they had slipped to 7.8 cents.


Or consider LUKoil, another market mover. Six months ago it was at $4.12; Wednesday it was at $8.


The bond market, meanwhile, continues to earn favorable reviews as undervalued, and on Wednesday Standard & Poor's rating agency raised the credit rating for Russian Eurobonds, and also for some dollar-denominated Finance Ministry bonds, to CCC from CC.


S&P said Russia's overall foreign currency credit rating remained at "selective default," reflecting the ongoing default on some Soviet-era debt.


In October, as the ruble was collapsing and Yevgeny Primakov was taking over the Cabinet, Russia's sovereign Eurobonds were seen as in danger of being defaulted on. At that time, they were changing hands at an average of 20 cents on the dollar. These days, they are hovering well above 60 cents on the dollar.


Some corporate Eurobonds are doing even better. Alfa Bank's Eurobonds, for example, were trading at 10 cents on the dollar last fall; now, just a few months later, they are up at 64 cents.


Even as Goldman Sachs and S&P are talking up Russia, however, it's hard to say whether the mini-boom of 1999 will last. Arguably, it is already ending: Wednesday the dollar-denominated Moscow Times Index of 50 leading stocks sank 6.76 percent on trading of $12.82 million.


The Moscow brokerage MFK Renaissance said in a report Wednesday that the market was adrift downward on "summer doldrums," and would likely continue to slowly slip for the rest of August. "There's just no demand at all," agreed the United Financial Group's Igor Vayn, in remarks reported by Reuters. "This trend looks like it will continue through the end of the month."


Even so, the MT Index has recorded a doubling in value of the Russian stock market this year - from 38.37 at the beginning of 1999 to a July peak of 111, before settling lower Wednesday at 80.93.


Any country where in just six months the stock market doubles and the values of bonds triple is going to look sexy from New York or Geneva. So international financial players - who lost hundreds of millions in the bust of 1998 - are returning, at least to browse if not to buy.


Of course, it is not yet possible to do more than nibble at the Russian markets right now. Trading volumes for both stocks and bonds are too tiny to allow for much action, and any player who goes to sell or buy big will distort the market too much to realize sizable gains.


But the gradual reconstruction of confidence could allow for stellar gains again in the future.


"There were almost no brokerage reports [about Russia] circulated last fall," said Coast Sullenger, head of investments for Russia and the CIS with Lombard Odier Bank, in a telephone interview from Geneva. Now that's changed and analyses touting Russia are marching through the door.


"Seeing more and more reports over the last weeks one can guess many banks have increased their weighting on the Russian market," Sullenger said.


London-based investment banks and companies have been issuing either neutral recommendations or advice to buy Russian paper. There were no bankers amon g those The Moscow Times contacted that recommended selling Russian paper instead of holding on to it in the hope it will keep climbing.


Of course, the breathless enthusiasm of 1996 and 1997 is nowhere to be found, and even those who say buying Russian can make sense often throw in caveats. The new wary optimism is captured in a recent research piece by investment bank ING Barings that characterizes Russia as "a sub-optimal investment world" - a place where a few good opportunities exist, but are spread sparsely among the wreckage left over from last year's crash.


What's more, in general, attitudes of Western investment bankers based abroad are more optimistic than rival forecasts issued in Moscow.


"This is a typical phenomenon throughout the globe," said Simon Vine, Alfa Bank's head of fixed-income trading. "People are usually more optimistic about foreign economies than their own."


Moscow houses, moreover, are optimistic as well, Vine said, adding, "Alfa Bank recently increased its Russian portfolio 50 percent."


Vine recounted that Alfa Bank had sold most of its Russian securities portfolio in the summer of 1998, before the August crash. In March - when the International Monetary Fund announced it would roll over $4.5 billion in debts - Alfa Bank began to buy Russian again, he said.


Vine said he thought Russian assets would be performing even better if the Russian government would just pay more attention and talk up the boom with more confidence. Instead, he said, the government has been doing a poor PR job touting Russia in the West."As a result, [foreign] bankers feel sour, and only part of the investment community feels confident about Russia," he said.


Why the renewed interest in Russia - just as it enters what promises to be a bitterly fought parliamentary and presidential election season?


Partly because the nation's economic situation is far better than had been expected just a few months ago. January predictions that 1999 inflation would hit 100 percent have been scaled back to predictions of just 50 percent.


Predictions that the Gross Domestic Product would shrivel up by 8 percent have also been routed: Helped by the devaluation - which has cut costs in dollar terms and made exports cheaper for foreign customers - industrial production in June surged 9 percent year-on-year, reaching its highest level since December 1994.


Some economists are now predicting Russia's GDP won't contract at all this year. The particularly bullish Goldman Sachs forecasts 1.1 percent GDP growth in 1999 and growth in industrial output of 7.8 percent.


"Many people expected a far worse situation," said Andrew Kenningham, a senior economist with Merrill Lynch, in a telephone interview from London. "But it has turned out not as bad as predicted."