The Russian stock market has been growing at an impressive pace. The landmark Russian index, RTS, calculated from 50 stocks, grew from 1,125 to 1,852 points by December 26. This is a surge of 65%. Its capitalization soared by 92% since the beginning of the year to $940 billion in mid December.
These trends are to a large extent caused by Russia's improving investment climate and increasing transparency of Russian companies, first of all state-controlled giants like Gazprom and RAO UES. Influx of foreign investment in Russia is growing. According to preliminary estimates of the Finance Ministry, foreign direct investment in the Russian economy this year will have reached $23-25 billion against $13 billion last year. Investors seem to have appreciated Russia's move to pay off its remaining debt to the Paris Club ($21.3 billion) and to abolish the last remaining currency restrictions in July.
The stock market is also supported by the macroeconomic stability in the country, the strengthening national currency and high domestic investment and consumer demand. The GDP growth this year will be 6.8-6.9%, according to the Economic Development and Trade Ministry's preliminary forecast. Fitch and Standard & Poor's put Russia's sovereign rating just one notch below the A category, which stands for the highest solvency.
Russia is also strengthening its positions on the global IPO market. An increasing number of Russian companies are floating on the national and international exchanges. So the Russian stock market is finally beginning to carry out its key macroeconomic function, serving to re-channel savings into investment and becoming a real borrowing mechanism for large companies. Rosneft staged the biggest IPO this year, floating 14.8% of its stock in Moscow and London, raising $10.4 billion.
At the same time, the Russian stock market is dependent on the developments in other countries. For example, if the U.S. Federal Reserve or the European Central Bank raises the refinance rate, this increases volatility on all emerging markets, including Russia. This happened in 2006, when the Russian market grew by 51% in January-April, but then plunged by almost 25% following similar trends on all fledgling markets. Fears of foreign investors resulted in money outflow from these markets, but a few months later growth resumed, mostly because of the general growth on emerging markets.
The situation with commodities prices, especially oil and metals, continues influencing the Russian stock market. The Russian economy is very dependent on export revenues, which have an effect on every sector, including the financial performance of producing companies and the price of their stocks. This makes Russian stock market indices even more unstable.
On the other hand, when the Russian market saw a correction last autumn because of declining oil prices, investors redirected some money from oil stocks to other sectors. Their interest in the industrial, telecommunications and consumer sectors increased, encouraging diversification of the market and positively influencing the economy.
All of this means that the Russian market still belongs to the emerging markets category. So it is highly vulnerable and dependent on short-term speculative capital.
Moreover, too few Russian people have invested in stocks. About half of the Russian market is represented by foreign speculators that follow global trends. But as incomes increase and savings become better organized, the situation is likely to change. People in large cities are beginning to put their money in investment unit funds and buy shares during IPOs. Rosneft's placement was even described as the first popular IPO in Russia, because part of the stock was offered to private investors, who bought about $600 million worth of shares.
Despite all these problems, the general situation on the Russian stock market in 2006 was favorable. The financial authorities believe that the trend will continue in 2007, supported by new IPOs and influx of investors, both Russian and foreign. Among the most expected placements are those of large state-controlled banks, Sberbank and VTB. The recently set up United Aircraft Corporation is also expected to float at the turn of 2007-2008.
The oil and gas sector is likely to continue attracting investors for a long time to come. But analysts forecast that the second tier can prove as profitable as blue chips next year. The most attractive sectors will be power generation (with several RAO UES wholesale generating companies expected to float), steel production (Magnitogorsk Iron & Steel Works may hold an IPO and the recently merged Russian Aluminum will appear on the market), telecoms, the banking sector and retail.
The opinions expressed in this article are those of the author and may not necessarily represent those of RIA Novosti.
