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. Last Updated: 07/27/2016

Time to Bet On Russia?

Russian stocks are blazing to heights not seen since the heady days of 1997. Andrew McChesney takes a closer look at the shares mania and finds that luck is still a fortune.


Moscow-based brokerage Troika Dialog held a contest last year asking hundreds of market players to guess what level the Russian stock market would close at on Dec. 31.

Out of the almost 400 enthusiasts brave enough to take a stab, Troika announced in mid-January that the market genius was ... Margret Ahlstrom, a secretary at Swedbank in Stockholm who does not even follow the Russian stock market.

For her perspicacity, the winner received two round-trip tickets to Moscow and a weekend at the Marriott Grand Hotel. A Russian-based winner could have had their choice of a weekend in London or Paris.

The Millennium Competition, as the contest was called, opened in late October and closed Nov. 30, and was run through Troika Dialog's web site (

Market insiders and even Ahlstrom credit sheer luck for the correct guess. After all, traders say, the Russian market is so volatile that predicting where it will be in even a month, as was the case with Troika's contest, is like picking numbers in a lottery.

But a lot more is at stake on the stock market this year than an all-expenses-paid weekend in Moscow, market players say. Hundreds of millions of dollars could be made - or lost - as stocks roar into 2000 with more vigor than they have shown in months.

And many observers are now advising investors to jump on board for the 2000 bull run, saying the millions to be lost could well be the potential gains foregone by those who don't buy ahead of the potential boom.

"The market could shoot up at any time," says Christopher Weafer, head of research at Troika Dialog. "I'd rather be in the market than out."

A Word to the Wise

One thing that any prospective investor in any stocks should bear in mind is that most of the analysts that get quoted about the prospects for this, that or the other share or share market are a long way from being disinterested observers.

These people work for brokerages and investment banks that are very keen to see more money invested in the shares they track. Even if investors that read or hear advice to buy Russian do not buy stocks with the analysts' employers, if they buy into Russian equities and help send the market up, it has positive effects for all the market players.

For that matter, it is even in the interest of The Moscow Times and its employees for the stock market to have a banner year. As a locally based business, anything that means more money coming into the Russian economy is positive. We at the paper do hope to see a strong recovery in Russian shares, although we also hope that any such recovery will be based on serious, long-term investors basing their decisions on sound fundamentals, and that any 1997-style boom that might occur would not be followed by a 1998-style meltdown.

None of the above is meant to impugn the honesty or propriety of any of the analysts quoted in this article, merely to point out the environment they operate in.

Finally, the most prominent feature of the Russian stock market over the years has been its volatility. Even in the first month of this year, when the general trend has been up, the Moscow Times index of 50 leading shares has bounced up and down like a yo-yo (see chart).

"One thing you've got to do is look past the short-term," says Preston Haskell, general director of Colliers HIB, a real estate giant and active player on the Russian stock market. Haskell, who says he dabbles in stocks "for fun," jumped on board in October 1997 and has never regretted staying on board through the roller-coaster ride that took the market to the depths - the MT index hit as low as 31 after starting 1998 at 313.

"Too many people are short-term oriented," he says. "If you pick a company that has good fundamentals and you believe in the industry, then in the long-term there are handsome profits in the Russia market."


Russian stocks entered the year 2000 with quite a bang, despite the fact that full trading did not commence until the string of Christmas and New Year holidays ended in mid-January.

Of course, the bulls had starting running in the last quarter of 1999 and the stampede roared to life Dec. 31, when President Boris Yeltsin's resignation caused enough investor exuberance to close the market down for rising too fast. Delighted that Russia was getting rid of its ailing leader, buyers sent the dollar-denominated Moscow Times Index of 50 leading shares soaring 18.47 percent that day, setting off circuit breakers that suspended trading at midday - the first time an upward surge had triggered such a reaction.

When what is typically quiet holiday trade reconvened Jan. 5 and 6, the market shot up another 5.78 percent. Despite a few mild corrections in recent weeks, the MT Index has kept climbing at a steady clip, closing Monday at 136.50, up 19 percent from its level just before Yeltsin's Dec. 31 announcement. The market is now some 89 percent higher than the 72 it averaged in early October 1999.

The RTS index has been following a similar trend. It ended Monday at 178.39, a jump of 21 percent from late December 1999, although only marginally above the level it hit for the euphoric Dec. 31 close. Traders and analysts are predicting that the RTS index will pass 300 sometime this year and could even approach the 400 mark.

Such unrestrained enthusiasm already has traders in Moscow brokerages leaning back with their mugs of steaming coffee, recalling the heady days of 1997, when the MT Index shot up above the 400 mark. The excitement these days has yet to match 1997, but the sheer demand - generating daily volumes of $30 million to $50 million - are a huge turnaround from the dead lull that stagnated the market for much of 1998 and 1999. Daily trading volumes were as low as $2.5 million in October 1998 and they had risen only as high as $16 million by July 1999 only to drop back again to less than $10 million by last September.

With Russia's economic and political environments stabilizing, investors are finally taking a closer look at Russian stocks, and they like what they see.

"The market is cheap, but the future of Russian assets is very attractive," explains Marina Ionova, chief strategist for Aton Capital Group. "Resources are cheap, labor is cheap and the experience of the last five years shows us that Russian labor is not bad at all."

Factor in global oil prices soaring to fresh heights, and the market - soaked as it is with oil stocks - looks like a bargain. In fact, oil shares have taken the forefront in the surge, in large part because shares in No. 1 oil company LUKoil and No. 3 Surgutneftegaz account for about 50 percent of the capitalization of the market.

"With [high] oil prices, the economy will continue to recover, inflation will continue to fall," says Phillip Poole, head of emerging markets research at ING Barings in London. "That kind of macroeconomic environment creates the scope for the market to outperform."


But a big question for investors is: How long until the gravy train pulls into the station?

Most traders believe the market will steadily grow throughout 2000, and the general consensus appears to be that the best time to buy - either on your own or, preferably, through an investment fund - is within a month.

"If you want to invest until the end of the year, it is the time to buy," says Kirill Maltsev, head of equity sales and trading at Rye Man & Gor.

Weafer and other experts are saying that if you wait, you could lose out. The market could jump at any moment on, for example, an unexpected announcement that a peace deal has been struck in the Chechen conflict or that progress has been made in multibillion-dollar debt talks with the London or Paris clubs of creditors.

"Specific political actions will drive investors instead of fundamentals," Weafer says.

Even if no such developments take place, the ride upward is likely to continue, with investor enthusiasm hitting a small peak ahead of the presidential election scheduled for March 26, traders say.

"When we are a little bit deeper into the presidential campaign we will get a better idea of what will be after the election," says Nancy Herring, director of research at Regent European Securities.

"Maybe two to three weeks before the election we will see some excitement in the market," she says.

However, even if further growth develops as expected, it will be inherently fragile because so much of it will be pinned on what policy the new president decides to take on the economy. Acting President Vladimir Putin, who is widely expected to sweep the polls, has remained mostly silent on legislative and economic issues.

"We have a very positive near-term view on the market," Weafer says. "[But after March's election] the recovery that started in October will be over and then we'll have to look at long-term issues."

The new government and specifically Putin - if he is indeed elected - will have to address concerns such as what kind of legislation will be enacted over bankruptcies, taxes and production-sharing agreements; how Russia will handle its $70 billion in Russian and Soviet debt to the West; and the losses of billions of dollars a year through capital flight.

In addition to these specific questions, he will also need to provide a serious, strategic vision for the economy, and demonstrate his capacity to push any such program through.

"My hope is that Putin, seeing that he does not have a lot of options in the economy anymore, sees he has a real opportunity for reform," Herring says.

"My little optimism scenario is Putin will push through some of the legislation reform that the West has been pushing for years," she says.

The festering internal issue that could bite at the market is the Chechen war, experts caution.

"As long as we have unhappy days in Chechnya, we have the possibility of more political noise in Russia and from outside," Ionova says. "This is very negative. This long-term war in Chechnya will play a more and more significant role in the market."

However, Poole says he sees limited risk in the Chechen war.

"Our view is that this phase of the conflict is coming to an end and the budgetary implications are manageable," he says.

External factors - of which global oil prices are arguably the most important - also need to be kept in mind, experts say.

Since oil stocks make up for more than half of the capitalization of the Russian market, any steps back in the upward trend of world oil prices would certainly be felt here. Prices had hit lows of $9 a barrel early last year before the Organization of Petroleum Exporting Countries decided in March 1999 to severely limit exports. Russia, which is a leading oil producer but not an OPEC member, has said it is closely adhering to the cuts.

"OPEC is like a tea bag: It only works in hot water - and it did last year when it pulled together [to cut sales]," Weafer says. "Last year they needed the money, but now they've had a good year."

Moscow-based market experts predict that the prices, currently at fresh highs of over $25 a barrel, will peak by mid-year and then weaken as supplies surge. Troika Dialog forecasts that oil prices for the year will average out at $18 a barrel.


With so many internal and external factors at play, one would be forgiven for saying that the investor who walks away with the fattest wallet this year will be the one who makes as wild a guess as Troika Dialog's contest winner, Ahlstrom.

Investors hoping to match Ahlstrom's success, however, may be a little disappointed to hear that she does not have a lucky formula that could be replicated.

"I was just lucky to get the right result," Ahlstrom says by telephone from Swedbank headquarters in Stockholm.

"I was talking to one of our area managers, and he told me the state of the market," she says. "I just guessed something would happen and it did."

Ahlstrom's guess was wide of the RTS index's Dec. 31 close of 177.71 by little more than a rounding error.

Few market players could have forecast that the market would have jumped so high above the 112.36 that stocks closed at on Nov. 30, the day Troika Dialog sealed the contest.

As Troika pointed out in a recent research report announcing the contest winner: "On that date ... the now second-largest Duma party, Unity, was quite low in the opinion polls; Russia's perceived Y2K failures soured investor sentiment; and Boris Yeltsin seemed firmly enthroned in the Kremlin. It nowlooks like another century."

Participants in the contest entered guesses ranging from a low of 17.23 - offered by a Russian - to a high of 385.5 from London, Troika Dialog said. Most entrants were cautiously optimistic, with the average prediction seeing the market close up 14 percent at 128.

Russian contestants, who accounted for about one-third of participants, were overall more pessimistic than their Western counterparts.

"Statistically, the expectations and results are remarkable," Troika Dialog says in its report. "Given the normal distribution of the entries, the actual results were a statistical anomaly. With a mean of 128 and a standard deviation of 20, the probability of a result of 177.71 was around 5 percent."

Troika Dialog says entries were received from as far away as Latin America, the United States and Asia, but the contestants whose guesses were closest to the actual correct answer were based in Central Europe and Scandinavia.

"The winner was in Sweden, which did not surprise me because countries that are closer physically to Russia tend to get a better coverage than, for example, Latin America," Weafer says.

Troika drew three conclusions from its contest, findings that market analysts say investors would do well to keep in mind when it comes to Russian stocks:

-Russia's stock market remains very volatile.

-It helps to have a global perspective. Those closest to the market epicenter are often blinded by the small ups and downs and thus see too dimly what lies ahead.

-Consensus investing, represented by the mean of all entries, appears to be inefficient.

Thus the wild bet may well be the bet that pays off this year on Russia's stock market, insiders say.

Meanwhile, an investor hoping for a hint from Swedbank's Ahlstrom had better look elsewhere. The lucky secretary says she is bowing out of the Russian stock game and setting her sights on visiting Moscow for the first time early this summer.

"This is sort of an adventure, something I've been longing to do," Ahlstrom says of her upcoming trip. "There's so much in Moscow that I would like to see - the Kremlin, the Bolshoi and maybe even the stock market."