Russian bears

tauringhuang.

Sep 4th 2008
From The Economist print edition

Investors take fright at political tensions


WHILE the Russian army has been on the march, investors in Russian financial markets have been in retreat. The MICEX benchmark of Russian equities has fallen by about 30% since the start of June. In August the rouble suffered its worst monthly decline for more than nine years.

The invasion of Georgia and the rise in political tensions with the West have not helped sentiment. But investors were getting worried even before the flare-up over South Ossetia and Abkhazia, the breakaway Georgian provinces. The handling of the dispute between BP, a British oil company, and its Russian partners in the TNK consortium was followed by acerbic remarks from Vladimir Putin, the president-turned-prime minister, about the head of Mechel, a Russian steel firm. That has fanned fears that the government will operate an aggressive form of “state capitalism” and ignore the rights of foreign shareholders. In addition, the Russian market is seen as a commodity play and the recent $40-a-barrel fall in crude prices has hit the share prices of natural-resource companies.

Some believe that much of the bad news is in the price. Ivan Tchakarov, a Russian strategist at Lehman Brothers, points to Russia’s strong fundamentals, including an 8% growth rate and surpluses on both the fiscal and current accounts. Glen Prentice, a fund manager at WestLB Mellon, thinks the Russian market is cheap and is adding to his positions in his eastern European fund. But Michael Hartnett, a Merrill Lynch strategist, has downgraded the Russian market, citing “high inflation, rising corporate yields and capricious politics.”

Fear of further Russian disputes with countries like Ukraine or Poland has had an impact on other markets in the region. The stockmarket of Ukraine (which has a substantial Russian-speaking population) has fallen by more than half this year and was hit again on September 3rd when the government collapsed.

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Again, politics is not the only factor. Inflation in Ukraine was running at almost 27% before the Georgian crisis. The rest of eastern Europe has depended heavily on exports westward and is struggling given the recent fall in euro-zone GDP.

Fitch, a ratings agency, forecasts in its recent report on eastern Europe that GDP growth in the region will slip to 5.8% this year (the lowest since 2002) and to 5.2% in 2009. Many of the countries have big current-account deficits and some, notably Estonia and Latvia, are at risk of recession. As Fitch remarks, “the conflict between Russia and Georgia has added another layer of risk to parts of the region at an inopportune time.”