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Raising Russia’s Risk Premium

Andrew Langley at the Wall Street Journal talks with a lot of very pessimistic analysts following the market fiasco in Russia last week:

Although many observers in Moscow expect that situation to ease as Mechel acts on Mr. Putin’s remarks and amid a consensus among analysts that a state-run energy company will buy the Russians out of TNK-BP, the already-flimsy confidence in Russia’s market was shaken. Indeed, investors are re-evaluating the risk premium they assign to Russia. “Applying the Yukos-era equity risk premium would lower our fair value For Russian stocks by around 25%,” Renaissance Capital said. “The current market P/E of 8.7 may no longer offer a sufficient discount,” warned UniCredit, referring to the overall price-to-earnings ratio. P/E ratios are used as a valuation metric; by contrast, the Standard & Poor’s 500-stock index in the U.S. has historically traded at a P/E in the mid- to upper-teens.