beyondbrics

On the face of it, it looks like investors believe the risks associated with Russia’s wave of protests have already had their day.

Russia’s stock indexes have surged this year with the dollar-denominated RTS up 20 per cent and the rouble-based Micex up 11 per cent year to date. Both have recovered the steep 11 per cent losses they saw in December when unprecedented demonstrations spooked investors. Of course, the general recovery in global sentiment has helped – but it does seem that investors have stopped worrying so much about Russian political risk.

All eyes are on the presidential elections next month, where prime minister Vladimir Putin is odds-on favourite to see off challengers.

“The perception of political risk is definitely going down as investors see the latest opinion polls indicating Putin will win cleanly in a first round. That suits investors just fine,” says Chris Weafer, chief strategist at Troika Dialog.

“They believe the protest movement is unlikely to survive beyond the election. There are too many different vectors pulling it in different directions and after the election the main focus will be gone.”

But – despite the recent gains – not everyone believes it’s safe to venture back in. Lingering fear over political uncertainty is one reason Russian price/earnings valuations still languish at a 35 per cent discount on average to global emerging market averages, compared to the usual 20 per cent discount (itself a factor of Russia’s poor investment climate and overdependence on oil).

According to Weafer and Jacob Grapengiesser, a partner at East Capital, the investment fund, a lot of money is still on the sidelines awaiting the outcome of elections. “People took a lot of money out in December. Many of them have still not returned,” Grapengiesser says. “US investors sitting in New York investing in 20 emerging markets lost money in Egypt because of the Arab Spring. They decided its better to be safe than sorry and just dropped their positions.”

Russian investors don’t look any braver. Capital flight continued unabated in January. Deputy Economy Minister Andrei Klepach on Monday put the figure at $17bn last month, a figure even greater than the $14bn in outflows recorded in December.

Foreign investors could start coming back in greater force, Weafer and Grapengiesser say, if Putin wins cleanly in a first round, bringing a boost to share prices. But a second round run-off could prolong the uncertainty.

Any further rally would depend on the reforms a new Putin government embarks on. According to Grapengiesser, the best-case scenario for investors would be Putin carrying out a sweeping overhaul of the government and filling the ranks with new faces keen to make changes. “Then there would be continuation of the political system but also reform,” he said.

Weafer said investors were hoping the protest movement had been a force for the good. “Investors believe the protest movement will have a legacy of forcing the next government to more actively pursue a reform agenda. There is the sense that the protests have shaken up the complacency in the Kremlin.”

But others believe it’s far too soon for Pollyanna views. “We’ve seen the reversal of political risk. But I don’t believe this risk is going away,” said Roland Nash, chief strategist at Verno Capital, the Moscow hedge fund. “There is still easy scope for something to go wrong during the protests. I don’t think the protests are going to just go away and after the elections it may be harder for Putin to legitimize himself.”

Indeed, agrees Weafer, any further allegations of vote fraud during the presidential poll, and the “political risk premium could start widening again, and investors could stay on the sidelines.”

Even though, according to Nash, “Russia even for Russia is cheap right now and fundamentally it still has a long way to go”, playing the Russian stock market, may still be a game of Russian roulette.

Related reading
Russian elections: the XX factor, beyondbrics
Guest post by Vladimir Putin: Russia needs more technology and less corruption, beyondbrics
Russia, Davos, and the rule of law, beyondbrics
Russia’s capital flight: not an urgent issue yet but looking bad, beyondbrics
Russia: Politics and uncertainty return to Moscow, FT