Markets Rise as Cabinet Settles In
Prime Minister Vladimir Putin's strong backing for aggressive oil tax cuts in the near future provided Russian stock markets with a long-awaited catalyst to push the RTS to a record high last week.
The RTS, the country's benchmark index, soared to 2,478.87 points, up 8.5 percent, while MICEX reached 1,943.88 points, a rise of 8.3 percent. It's a far cry from earlier in the year, when Russian markets tumbled along with their global counterparts on the back of the international credit crisis.
It was a week chock full of political maneuvers, sparked by the unveiling of the new Cabinet on Monday. There were some new faces on the scene, bolstering the liberals in government, while some of the more controversial figures were shuffled out of ministerial posts.
Investors were cheered by the reappointment of Alexei Kudrin, the respected Finance Minister, widely seen as a steady pair of hands and a guarantor of fiscal responsibility.
The biggest news among the Cabinet changes was the appointment of Igor Sechin, the publicity-shy Rosneft chairman and former Kremlin first deputy chief of staff, as deputy prime minister responsible for energy and industry.
His elevation immediately sparked hopes of a revival in the fortune of oil stocks. But it was on Wednesday that the oil rally really kicked in, after Putin announced an aggressive round of tax cutting in the oil sector.
The smooth power transition, the promise of tax cuts and signs that the government is raring to get to work on reforms was just the sign investors had been seeking, analysts said.
"This market has been looking for an excuse and has been wanting to go up for a long time," said Ron Smith, chief strategist at Alfa Bank. "The change in power ... is the catalyst the market wanted."
Energy stocks rocketed on the news Wednesday, with LUKoil and Rosneft adding 3.9 percent and 5.8 percent, respectively, on the MICEX, while Gazprom Neft rose 6.7 percent. By the end of Thursday, oil stocks had dipped on profit taking.
Oil stocks have been stuck in the doldrums for about 18 months, dragged down by a heavy tax burden that has eaten into profitability and prevented them from cashing in on record global crude prices over the past few months.
And investment banks have added fuel to the fire, with Goldman Sachs predicting Thursday that U.S. crude benchmark West Texas Intermediate would average at $141 per barrel over the second half of the year amid supply constraints. Prices will go higher in 2009, the bank said, to average $148 per barrel.
The oil stocks rally could have at least another month to run, Smith said.
But some analysts cautioned that the tax cuts, which will be sent to the State Duma for approval, would take time to work into the system. UralSib said they favored the oil-service stocks, particularly Integra and Eurasia Drilling, over the big energy names.
Gazprom was a surprise laggard among energy stocks, rising by just 4.5 percent on the week, as investors initially speculated that Sechin's appointment could spell disappointment for the gas monopoly. Analysts shrugged this off, with Smith saying Gazprom remained hugely undervalued.
"It's still early to say if this is the beginning of a continued upward trend," said Aivaras Abromavicius, a partner at East Capital, an Eastern Europe-focused fund with $6 billion under management. "Russia has still not completely decoupled from global markets. If we see more bleeding globally, Russian equities are not going to be immune in the short-term."
In sharp contrast to just two months previously, economists are saying a recession in the United States is not inevitable, and some commentators have suggested that the worst of the credit crisis might be over. It is not a view shared by all, however.
Meanwhile, the departure of Leonid Reiman, the controversial former IT and communications minister, provoked speculation that the long-overdue privatization of Svyazinvest might be back in the cards. Reiman was a day later appointed as an IT adviser to President Dmitry Medvedev.
Regional telecom stocks -- expected to benefit from a Svyazinvest privatization -- saw some relief, with Volgatelecom, North-West Telecom and Uralsvyazinform all winners last week.
But not everyone is banking on a revival of the privatization. "We are no more positive about Svyazinvest than before," Renaissance Capital said in a note.
Sberbank, the country's largest bank, rose by 4.3 percent over the week. Bank president German Gref, a former economic development and trade minister, said Friday that he hoped the bank could become one of the global 10 leaders in the next five years, a "difficult" task it would hope to achieve by acquisitions and a move into corporate banking.
VTB Group, among the biggest underperformers among Russia's blue chips since listing a year ago, climbed up by 6.8 percent on the week.
(The Moscow Times