Russian markets respond well to post-election moves

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By:
Guy Norton
Published on:

Investors search for regional opportunities.

As widely expected, the pro-president Vladimir Putin United Russia party won a landslide victory in the early December parliamentary elections, securing an absolute and constitutional majority with more than two-thirds of the votes. In the wake of the crushing election victory, Putin nominated his first deputy prime minister, Dmitry Medvedev, chairman of Russian gas monopolist Gazprom, as his preferred candidate for the presidential elections scheduled for March 2008.

The announcement put an end to months of speculation about who would be Putin’s handpicked successor and was warmly greeted by the Russian markets given the widely held perception that Medvedev is a more pro-business candidate than former defence minister Ivan Ivanov, who was also seen as a potential successor.

As Euromoney went to press, United Russia was set to confirm Medvedev as its official candidate for the presidency, widely seen as a mere formality following Putin’s personal recommendation.

Although the country’s equity market remains vulnerable to changes in investor sentiment in the wake of the problems in the US sub-prime mortgage market and the associated global credit crunch, the Moscow exchange recorded historical highs almost daily in December on the back of the increased political certainty ahead of the March presidential poll.

One of the key investment themes on the equity side in 2008 will be the continued search for profitable investments outside the obvious centres of economic activity such as Moscow and St Petersburg. "Russia is not like Germany, which is effectively one big suburb. There are lots of population centres scattered throughout the country," says Peter Halloran, founder of Pharos, an asset management company. He adds that identifying companies that are best positioned to benefit from the spreading wealth across the length and breadth of Russia is one of the big challenges for fund managers looking to offer investors added value beyond the obvious commodity plays in the oil and gas and metals sectors. Leonid Vakeev, executive director of UralSib Bank, agrees that there is a still lot of untapped economic potential outside Moscow, adding that there is plenty of scope for banks themselves to increase their horizons. "Banking penetration in the regions is still much lower than in Moscow," he says. "The big goal for UralSib is aligning its regional footprint with the market opportunities."

On the debt front, the European Bank for Reconstruction and Development registered another first for the rouble bond markets in December with the launch of the debut global bond denominated in the Russian currency. The Rbl2 billion ($489 million) three-year transaction, lead managed by JPMorgan, is the latest in a series of pioneering transactions by the EBRD, which is a big financial sponsor of the Russian economy. "We are very encouraged by the response to the issue," says an EBRD spokesman, noting that 37% of the transaction went to accounts in the US. "The deal certainly added to the overall depth and breadth of the investor base for rouble debt."

To date, the EBRD has raised a total of Rbl23.5 billion through bond issuance to finance a broad range of projects in Russia, which is its largest country of operation. The bank’s rouble loan portfolio continues to grow, with 43 loans totalling Rbl32.5 billion, up from seven rouble loans totalling Rbl3.8 billion when the EBRD first tapped the Russian rouble bond market in May 2005, following the currency’s accession to full convertibility.