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Metro blasts pressure rouble

The Moscow metro bombings on Monday hit the Russian currency, the rouble, yet ironically were a factor in gains on the energy-biased local stock market, on concern that further attacks could push up oil prices.

The two suicide bombings, which killed at least 38 people and injured more than 64, helped to boost global oil prices on Monday, the Associated Press reported. "Because Russia is a major oil producer, there are fears that there could be more attacks in the future," and this could cramp oil supply from the country, AP said, citing PFG analyst Phil Flynn said. Benchmark crude for May delivery jumped US$2.17 to settle at $82.17 a barrel on the New York Mercantile Exchange.

On the stock exchanges, the rouble-denominated MICEX index closed up 1.7% on Monday at 1,440, after initial weakness, while the dollar-denominated RTS index gained 2.3% to 9,891. The strongest sectors were telecommunications and raw materials (oil and metals). Energy and banking firms dominate the Russian equities market.

The rouble slid against the euro and the US dollar and may decline further before recovering, according to futures traders. The rouble closed at 34.15 against the target currency basket after falling by more 1% against the euro and half that much against the dollar. Futures traders expect the ruble to decline at least an additional 1.5% before strengthening again, according to Bloomberg News.

The recovering Russian economy and a rising oil price have helped the currency remain near the middle of the normative range of 26 to 41 set by central bank in January 2009. The target currency basket is calculated as a weighted average of 0.55 times its rate against the dollar plus 0.45 times its rate against the euro.

Overseas funds have been flowing heavily into the Russian market, with UralSib Capital's reports of analyses by EPFR Global showing very heavy inflows of international investment at nearly nine times the flow into Brazil for the first week of March. These funds have gone mostly into exchange traded funds and index-tracker funds rather than into actively managed funds, although the amounts have fallen off a bit in recent weeks.

The MICEX has recovered 170% from its mid-November 2008 low of 533, while the RTS has nearly tripled from its low in late October the same year. The MICEX is now little more than 3% off its short-term high at 1,484 achieved on January 19, while the RTS is just more than 5% under its comparable high of 10,397.

Both indexes share the "double-top" formation noted in equity markets elsewhere. For both exchanges, these levels are the high-water marks since August 2008, from which period they both also retain long-term resistances at those levels, MICEX from the beginning of that month and RTS from the middle.

The World Bank increased its forecast for Russian growth last week to 5.5% for 2010. The bank's chief economist for the country, Zeljko Bogetic, argued that a double-dip recession in Russia was unlikely this year, with domestic consumption and domestic investment driving demand that will sustain the recovery.
Private analysts do not share this view. Ratings company Moody's forecasts growth this year in the 2-3% range, possibly strengthening in 2011. Analysts underline that the Russian recovery and future growth remain highly dependent upon world energy prices.

Neil Shearing of Capital Economics, for example, remarked last week to Moscow News on the continuing political and institutional problems that economists tend to neglect. In the absence of reform, he says, "the Russian economy will probably just fluctuate with oil prices for the next 20 years" and will be lucky to average 2-3% annual growth.

The Russian banking system requires further reform and its non-performing loans have yet to peak. The expected spate of primary and secondary offerings testifies to the unwillingness of large Russian banks to lend, whether to companies or to consumers, despite their relatively good balance sheets and levels of capitalization.

Thus the international investment community is expecting Russian companies to begin tendering initial and secondary public offerings after a two-year drought, in order to expunge external debt while risk appetite is still high, but mainly in London with some in Hong Kong (that is, not domestically).

Meanwhile, underinvestment in the country's energy sector is only one of a series of domestic infrastructure problems that have to be addressed by the political leadership on a strategic long-term basis.

The big unknown for the Russian economy is China. Since Russia is increasing its energy interdependence with China, any setback in the Chinese recovery, such as the bursting of the property bubble, would reverberate through Russian industry. While this was a concern even last year, some economic analysts now put the bursting of that bubble as far down the road as three years from now. Whether it would make a louder "pop" after all that time is another matter.

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URL:  http://www.robertcutler.org/blog/2010/03/metro_blasts_pressure_rouble.html
First published in Asia Times Online, 31 March 2010.

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