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What is Driving Russia’s Bull Market?

A story is running in today’s Wall Street Journal citing numerous money managers who are extending compliments and accolades to President Vladimir Putin for his stewardship of the economy. While the performance of the RTS index has been indisputably robust, there remains much debate over the extent to which oil prices should be credited for this bullish trend, or the economic policies of the government. russia_rts.gif Source: www.wsj.com A few excerpts:

When Mr. Putin took office in January 2000, the country’s publicly traded stocks were valued at $74 billion. Their value now exceeds $1 trillion. Russia’s benchmark RTS index rose 71% in 2006, the fourth year under Mr. Putin that the market has returned more than 50%. [Vladimir Putin] “He’s done a helluva of a job,” says Mark Mobius, an emerging-market guru and managing director of Templeton Asset Management Ltd. “The country has made tremendous strides in the time we’ve been there, and you’ve got to give Putin credit for that.” Many money managers are betting the rally will continue this year — even with lofty valuations, falling oil prices and rising political uncertainty in the run-up to Russian presidential elections in March 2008, when Mr. Putin is obliged by term limits to stand down. To be sure, some investors agree with Western criticism of Russia’s spotty human-rights record and of Mr. Putin’s moves to undermine the independence of Russia’s courts and parliament. They concede that in the long run democratic institutions are crucial for healthy market economies. But for the time being, concern about the state of Russian democracy isn’t driving share prices. Events that shape the West’s political stance toward Russia, like the unsolved murder in London last November of Alexander Litvinenko — the former KGB agent who on his deathbed accused Mr. Putin of having him poisoned — barely register on most investors’ radar screens. … Even among investors, however, Mr. Putin has his detractors. Some were outraged by the Kremlin’s politically motivated campaign against billionaire Mikhail Khodorkovsky and his company OAO Yukos, the blue-chip oil giant that was Russia’s most popular stock among Western investors until the Kremlin partially renationalized it in 2004. Mr. Khodorkovsky ended up in prison on fraud and tax-evasion charges. Others shrink from his aggressive brand of state capitalism. Many took exception, for example, to the way Royal Dutch Shell PLC was forced to sell control of the huge Sakhalin energy project to the government-run natural-gas monopoly OAO Gazprom last month after Russian regulators suddenly discovered a raft of environmental violations. Shell acknowledged some lapses but said it had been working to fix them. Western investors also frequently cite widespread corruption and a lack of transparency as major obstacles to doing business in Russia. Last year the country shared 121st place in watchdog group Transparency International’s annual corruption perceptions index with Third World countries like Rwanda, Benin and Honduras. Some businessmen complain that corruption has got worse under Mr. Putin. “In general, Putin’s been a good leader, though former Yukos shareholders and current Shell executives may beg to differ,” says Samuel Oubadia, co-manager of the ING Russia fund, which has $940 million in assets under management and was up 67.5% last year, the best 2006 return among U.S.-based emerging-market funds. Though the Yukos case cost investors around $45 billion in lost value, the Kremlin followed up with investor-friendly moves that did much to restore market confidence: the removal of restrictions on foreign ownership of shares in Gazprom, and the sale of stock in the state oil company OAO Rosneft last summer. … Part of the problem is that Mr. Putin has made little headway diversifying Russia’s economy and lessening its dependence on energy exports. “In the past, investors were able to give Russia the benefit of the doubt because its assets were so cheap,” says Mr. Weafer, the Alfa Bank economist. “Now they need to know where the long-term growth is going to come from.” Politics is another potential danger. Though there is little doubt that Mr. Putin’s preferred candidate — he hasn’t said who that is — will win the 2008 elections, uncertainty about the succession could still spook the market, some analysts warn. But betting against Mr. Putin has been a losing proposition for investors in the past. “I’ve said at the start of every year there’s no way we can get more than 30% out of Russia,” says Alexander Schwarzkopf of Altima Partners, which has $2.5 billion in assets under management, a quarter of it in Russia. “Every time I’m proved wrong.”