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. Last Updated: 07/27/2016

At 5 1/2 Year Record, RTS Approaches 500

The benchmark RTS index hit a new 5-1/2 year high Tuesday, extending a rally that traders and analysts said was no bubble about to burst.

The index rose 2.1 percent on the day to close at 495.5, up 38 percent since the start of the year.

The stellar rise has taken the RTS to its highest level since before the 1998 financial crisis, and some market players are beginning to worry about stretched valuations and the possibility of a looming correction.

But analysts said the flood of liquidity that has been lifting the RTS will not abate, and relative stability in the economy is likely to keep the money flowing in.

"This is sustainable, we are re-evaluating and the index can probably rise by another 20 to 30 percent," said Peter Westin, chief economist at Aton brokerage.

Economic Development and Trade Minister German Gref said Tuesday that the country's gross domestic product shot up 7.1 percent in the first five months of the year, compared to 3.7 percent a year earlier. Many economists now say the official GDP target for all of 2003 of 4.6 percent is too low.

Brightening the picture is a government forecast for 2003 inflation of less than 12 percent, down from 15.1 percent in 2002.

"The liquidity is based on a good economic story, reasonably stable politics, a high oil price and rising international markets," Roland Nash of Renaissance Capital said.

"It's based on all those things. The speed at which the market is moving is liquidity. The cost of rubles is five percentage points below inflation. Money is essentially free in Russia."

Cash-rich Russian investors have been chasing a tiny handful of stocks, flush with oil revenues after crude prices soared ahead of the U.S. invasion of Iraq. Russia is the world's second-largest oil exporter.

In particular, they have homed in on a few key electricity stocks seen as strategically interesting to the oligarchs, who have already made their fortunes in oil.

"In 1997, no Russian oligarch in his right mind would have bothered to buy stock back, whereas a fundamental reason for growth now is the use of the Russian equity market to gain control of strategic assets," said Eric Kraus, chief strategist at Sovlink brokerage.

That, in turn, has dramatically reduced the amount of stock available to investors, squeezing share prices higher.

Some share prices have risen over and above what many analysts believe Russia's utilities, telecoms and other key industries are worth.

Demand remains strong, however. Alexei Bachurin, head of trading at Metropol investment house, said any downward pressure could be absorbed by continuing demand for a few key blue chips.

"The shares are pretty expensive, but no correction is in sight. We should probably touch 500, but that's from a technical point of view. In practice there is continuing demand in LUKoil, Yukos, Mosenergo and Norilsk Nickel," he said.

Oil shares LUKoil and Yukos were up 2.7 percent at $19.41 and 2.18 percent at $13.15, respectively.

Some traders say the market was expecting an oil price collapse -- perhaps as low as $15 -- from a U.S. occupation of Iraq, and Russian oil share prices may not yet reflect crude prices in the mid to upper twenties.

Metals giant Norilsk Nickel, which got the green light for a key U.S. acquisition overnight and is also up on a well-received earnings release, was up 3.5 percent at $34.70.