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Russian economy and capital markets - Fairy tale ending or start of a nightmare?

A stabilized currency and higher oil prices have given a welcome fillip to the Russian capital markets. But could slumping economic growth and soaring non-performing loans undermine the recovery? Guy Norton reports from Moscow.

Reforms are crucial to recovery

Real estate: Rebuilding a house of cards

THE RUSSIAN CAPITAL markets have witnessed a remarkable change of fortune in the course of the first third of 2009 that has taken even seasoned Russia watchers by surprise. By the middle of April the RTS stock index was up 50% on its late February lows, and credit default swap spreads on Russian sovereign debt had fallen by a similar margin over the same period to below 400 basis points.

Having suffered a winter of discontent, are the Russian capital markets now set to enjoy a glorious summer? Although some participants have undoubtedly been cheered by recent market developments, others remain decidedly downbeat. "Russia tends to be either one of the best-performing or worst-performing markets in the world," says Kevin Dougherty, an equity portfolio manager at Pharos Financial Group. In 2008, Russia was firmly rooted in the worst-performing camp, with the RTS index slumping by 75%. This year, in contrast, Dougherty believes that Russian stocks could be among the best performers. "We could see the Russian market double in 2009, if oil prices keep on rising," he says, before adding the all-important rider: "But we’re still cautious on the global environment on the back of the removal of leverage following the credit crunch."

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