'Bubble builds' in Russian market

Russian stocks have risen strongly over the past year

The Russian stock market's meteoric rise over the last year may have reached a ceiling and fears are growing that a financial bubble is forming.

With Moscow's benchmark RTS having risen 83% over the last year, the government now believes that prices are at dangerously unsustainable levels.

An huge influx of foreign pension funds and surging Russian oil revenues have driven the stock market's record rise.

Growth in shares of energy firms has been a particular source of concern.

"We are very afraid that a so-called bubble is being created," said Russia's economy minister, German Gref.

"We need to keep our finger on the pulse of key companies to be sure that investor optimism does not lead to a collapse."

Cooling the market

Last month, Russia's stock market regulator secured backing from the Kremlin for a series of reforms designed to cool down the current boom in share prices.

When a market is rising because the supply of funds is greater than the supply of assets, it is difficult to say when the ride will end Roland Nash, analyst RTS index over 12 months

This followed a warning from the head of Russia's Federal Financial Markets Service, Oleg Vyugin, who said that the current level of share prices was unsustainable.

His reform strategy includes more pension fund investments and extra safeguards against insider trading.

Analysts said Moscow wanted more stable markets ahead of future privatisations.

A wave of market flotations are expected this year, including the keenly-awaited float of Russia's Rosneft oil group.

But some analysts warn that the level of enthusiasm for the Russian stock market is not justified by economic fundamentals.

"When a market is rising because the supply of funds is greater than the supply of assets, it is difficult to say when the ride will end," said Roland Nash, head of research at the Renaissance Capital investment bank.