Bulls reign on Moscow's market

With investors wary, trading volume remains thin

By BBC News Online's Alexander Koliandre

After three years of crisis and muddle, Russia is a hot market again.

Russia's main share index - known as the RTS - hit its high for the year, up 67% since the beginning of the year.

Stock market performance, year to date

Russia +65.7%

USA -6.2%

China -17.0%

UK -18.7%

Germany -22.6%

Japan -28.6%

Brazil -31.1%

This makes Russia by far the best-performing stock market in the world, at a time when most others have wilted under the weight of the global economic slowdown.

High oil and other commodities prices, cheap national currency, political stability and some crucial reforms made 2001 the best year for the Russian economy since the start of market reforms 10 years ago.

Not oil only

Russia has boomed before, notably in the mid-1990s, culminating in a massive market rally in 1997.

We hardly can envisage any catastrophic scenario for Russia in the nearest future

Sergey Gromov, Troika Dialog

But this time around, observers hope the Russian market is not merely an oil-fuelled bubble.

On the same day the index hit its record, the IMF's representative in Moscow announced that even a drop in oil prices would not force Russia go to the Fund for fresh loans.

The London-based European Bank of Reconstruction & Development (EBRD) reported that Russia's economy will grow 5.5% this year and 4% in 2002, if oil prices stay above $18 per barrel.

Growth can even be preserved at $12 per barrel, the EBRD thinks - way below even current depressed prices.

The Kremlin has launched a few key reforms

Although the Russian market is heavily weighted towards oil companies, analysts point out that its structure has changed during the past year, with traditional blue chips less important in the RTS.

And traders and government officials agree that a modest fall in oil prices might be a good thing, since it would make investments more equally distributed among different sectors of the economy.

Optimism rules

Even Russia's notorious corporate governance is improving - albeit slowly.

And while foreign investors are still shy, having been burnt badly in the economic crisis of 1998, Russian capital is starting to return to the country from offshore.

Traders are mostly optimistic.

"Although the strong ruble and volatile oil prices are harmful... we hardly can envisage any catastrophic scenario for Russia in the nearest future," says Sergey Gromov, sales and trading manager at Troika Dialog Investment Company.

Investors have welcomed a few key Kremlin reforms, notably a new tax and land code, and the liberalisation of some wasteful monopolies.

On the other hand...

But not everything is rosy.

Even now the market volume is less than half what it was in 1997, mainly because of the shortage of foreign capital.

Although the situation has been improved, there is not an awful lot of transparency within the government and the bulk of the firms

Alexey Moiseev, Renaissance Capital

Sceptics point out that around 40% of Russian companies still make loss, and imports are rising while exports of anything but basic commodities remains low.

The majority of plants are badly managed and equipment is all but obsolete.

Small and medium sized businesses are few and the undeveloped and unreformed banking system makes it difficult to obtain credits.

Corruption and huge bureaucracy are still Russian trademarks.

Moscow murk

And the market itself is still dangerously opaque when compared to Western countries.

The majority of factories are badly managed

"Although the situation has been improved, there is not an awful lot transparency within the government and the bulk of the firms", said Alexey Moiseev, chief economist for Moscow-based Renaissance Capital.

There are fears that the old generation of "oligarchs" - the clique of influential business leaders - have merely been replaced by new ones.

Moscow may be riding on the crest of a wave at present.

But waves can fall as well as rise.