"LESS RISK, LOWER RETURN" - that was the title of one Russian investment bank's prognosis for portfolio investments in Russia in 2003. The argument that Russia had emerged from the wild fluctuations of the 1990s (and so triple-digit returns) and was approaching a fair-value equilibrium was appealing. Once again, though, that line of reasoning seems to have been completely wrong.
The leading RTS (Russian Trading System) indicator has bounced about almost as much over the first half of this year as it has always done. Rising domestic liquidity started to swell share prices before foreign investors flooded back into a stock market that was increasingly thought to have outgrown its historical volatility. The RTS rose rapidly from 360 at the start of January and by June had sailed through the psychologically important 500 mark, clawing back three-quarters of all the ground lost since the 1998 financial crisis.
The new-found enthusiasm evaporated just as quickly when in July the Kremlin turned on Russia's biggest oil company, Yukos, the poster boy for good corporate governance reform, sparking fears of large scale renationalizations. Yukos's market capitalization fell by $2 billion in a week and the market as a whole dropped by about a quarter.