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. Last Updated: 07/27/2016

Putin's Words Give Markets Welcome Relief

Signals that President Vladimir Putin might take a leading role in the Kremlin after the March election pushed the RTS to a new record last week as analysts welcomed an end to the uncertainty that has been plaguing Russian stocks.

Last Monday, Putin publicly slipped the word that he might stay on in government as prime minister. From an investor's point of view, it was perhaps the best possible news.

"I'm overjoyed," said Eric Kraus, managing director of the Nikitsky Fund. "Looking back at Putin's seven years in office, investors feel very reassured. They don't want to see another roll of the dice."

He wasn't the only one to be feeling good about things. After a disappointing start to the week, by Tuesday both the RTS and MICEX were leaping off the page in reaction to the news. The RTS saw a 3 percent gain as it powered through its 52-week high to reach 2,108.57.

TMK (up 12.4 percent), NLMK (up 9.7 percent) and Comstar-UTS (up 8.8 percent) led the charge, while blue chips Sberbank, LUKoil and Norilsk Nickel all performed well.

"This may not be the optimal democratic structure, but it allows Putin to stay on legally," said James Fenkner, a managing partner at Red Star Asset Management. "As long as he is in the Kremlin, he provides a backstop."

Compared with its emerging market peers, Russia has put in a pitiful performance this year. According to figures from Red Star, Russian exchanges are up 9.5 percent in the year to date. This compares with 43 percent in Turkey, 25 percent in Egypt, and a staggering 107 percent in Shanghai. Since mid-August, the picture is a little better, with the RTS up 16 percent.

While this can, in part, be attributed to the poor performance of oil stocks, which dominate the RTS, many analysts have taken the view that the political situation has held the market back. Remove that uncertainty, and the markets will rebound, the thinking goes.

"Current policies will likely be ossified for at least the next presidential term," Tatyana Orlova, an economist at ING Bank, said in a note to investors on Tuesday. A plausible scenario put forward by ING is that Prime Minister Viktor Zubkov will become the next president, with Putin as the prime minister. Zubkov might then be sidelined within a year or so on the grounds of his advancing age, clearing the way for Putin to take the reins of power in the ensuing presidential election.

Political certainty in the short term is all very well and good, but it is only postponing the problem, some analysts say.

"What will happen after Putin, whether the question will be raised in four, eight or more years?" Gaelle Blanchard, an analyst at Societe Generale, wrote in a research note. "Unless the next legislatures work on stabilizing the institutions and balancing power, foreign investment into Russia is likely to be constrained by the reliance of the country on one man."

By midweek, it was all about profit taking, and foreign investors were still shying away. State-owned Sberbank was the biggest loser Thursday, dropping 2.5 percent on both exchanges. Norilsk Nickel's steady progress -- 34 percent since August -- was checked Friday, after its first-half earnings fell slightly shy of analysts' expectations. The RTS finished the week at 2115.43, up 2.1 percent on the week's opening, and MICEX at 1802.45, up 2.44 percent.

Good news from the United States is expected to spill over into Russian markets. Friday's U.S. labor figures showed that employment was up in September, welcome news after a bad month in August, when the figures dropped for the first time since 2003, fueling fears of a recession. On Friday, however, revised figures for August indicated that jobs had actually increased.

While investors in Russia are broadly in agreement that the country is looking very cheap right now, foreign buyers don't seem to be in any hurry to rush in, undermining the view that the perceived political risk was holding everything back. Russia is facing phenomenal competition in Asia and Brazil for asset managers' funds, and unless there is an appreciable slowdown in those markets, investors say Russia may just have to wait its turn.

"Everyone wants to jump on the train as it leaves the station," Kraus said. "[In Russia] people are seeing that there is no momentum. It's going to have another run, but it's a question of timing. ... [Right now] investors think they can make more money elsewhere."