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Snow, bear and over 100% index appreciation (by D.Kulakovskyi)

|Includes:CTCM, MBT, Mechel OAO (MTL), RBL, RSX, VIP, WBD

First off, we’re glad to welcome you, our first readers, in our blog, and hope you’ll make use of it.  This blog is an effort to introduce at least a modest portion of the seemingly vast audience of investors interested in emerging markets to investment opportunities arising in financial markets across ex-USSR and, especially, in Russia. In particular, our further posting will fall into 4 categories: general overview of Russian stock market, overview of particular sector, corporate finance and Russian stock market, and basic guidelines on how you can benefit from the first 3. The blog is put together by two senior year financial undergrads, Dmytro Kulakovskyi and Lev Kuznetsov, separated by borders and thousands of miles, but united by the passion towards stock markets and the pursuit of financial careers.

Why Russia?

We feel that, in spite of the tremendous growth in attention towards emerging markets observed over the last decade, the informational coverage even of some of the largest emerging markets remains far below the level, which recent performance of those markets would suggest. Consider this: between 2000 and 2010 leading Russian stock indexes grew twice as fast, as NASDAQ grew in 90’s, but attention to Russian market and emerging markets as a whole pales in comparison to the media coverage IT industry received in 90’s. 

There are two primary indexes used to track Russian stock market: RTSI and MICEX. Just to get a better idea about the performance we mentioned and how it compares to that of other emerging markets and S&P500 see the graph below:

Of course there are numerous reasons for the poor informational coverage: Russian market is not as liquid, not as transparent and, as implied by pricing on money markets, not as stable, as OECD markets. Hence, the weak interest towards it. Below we will examine what essential implications those factors of lack of interest have for individual investors.


Every major sector on Russian market has numerous companies publicly traded at more-than-sufficient volumes (at least as far as individual investment goes). With total market cap exceeding $700bln Russian stock market provides more investment opportunities than any other Eastern European market (for comparison, total market cap of Polish companies is $150bln). Average trade volume for the companies listed on MICEX toped in 2008 at $24mln. But what’s worth mention here is that it really is skewed towards resource-intensive industries. In fact, oil and gas industry alone accounts for about 50% of total market cap. But with the total market capitalization of $700bln the remaining half of it still provides you options to choose between. Specifically, the rest is broken down as follows:


The list of stocks with highest trade volume also reflects the skew:

Obviously, the skew towards mineral resources imposes sensibility to major resources prices on the whole market.

As there is no way we could cover every sector in this introductory post, for detailed information on weights and performance of particular sectors we will forward you to (

Macroeconomic outlook

Over the decade both macroeconomic and political outlooks of the country have been steadily improving, causing drop in the values of national risk metrics.  

Since we don’t expect our readers to be deeply familiar with economic history of the region, we would start with data on some of the basic macroeconomic indicators:

As indicators attest, performance of Russian economy in terms of GDP growth, inflation, external trade and exchange rate stability has significantly improved since 2000 compared to that of 1990’s. These trends were taken into account by credit rating agencies resulting in Russian sovereign rating appreciation (S&P ratings):

According to S&P BBB rating is an “investment” grade (as opposed to speculative BB+) and suggests “adequate capacity to meet financial commitments, but more subject to adverse economic conditions”.

That being said, Russian economy still does exhibit several troubling trends, which we will try to outline: 
  1. Overreliance on natural resources: according to IMF research soaring oil prices and increase in oil extraction account for up to 80% of federal budget revenue increase (“Budgetary Impact of Oil Prices in Russia” by Goohoon Kwon), which obviously imposes significant market-wide sensitivity to oil prices. O&G- exports-to-GDP ratio between 1998 and 2006 increased from 0.1 to 0.2. In 2007 73% of exports fell at fuels and metals. Although officials seem to realize the problem and do embark on various diversification programs, no material result has been attained so far.
  2.  Unstable capital flows: in spite of “investment” grade S&P rating institutional investors still treat Russian economy as highly speculative, which translates into cycles of net capital inflows and outflows.External shocks have severe effect on Russian economy, since possible internal demand deterioration is likely to overlap with capital outflow, which would lead to financial markets being sucked out of cash dry. It happened in 2008 and led to sharp decline in stock prices and spike in interest rates.Such conditions contrast with what we can see in OECD economies, where global recessions are usually accompanied by capital repatriation and interest rates decrease.
  3. Institutional concerns: the country is well known for its corrupted government, lack of business ethics, and power of special interest groups. According to recent research (Le Monde) bribes and kickbacks amount up to 50% of GDP. Transparency International places Russia at 146th position in its Worldwide Corruption Perception ranking (on par with Sierra-Leone and Kenya). As a result, due to unpredictability of officials’ policies and courts’ bias any investment bears additional unquantifiable structural risk.


As follows from the above, just as any emerging market Russian market is, without a doubt, riskier than those of developed economies. But rational decision-making is not based on risk analysis alone. It rather takes into consideration the balance between risk and potential benefits. Of course this balance can be quantified using Sharpe ratio calculated for expected market-wide P/E and volatility, but we avoid this approach due to high uncertainty about both of these market-wide metrics. The way we want to estimate the risk/benefit balance is on company-by-company or at least sector-by-sector basis, since this approach would allow us to take more variables into account and, hopefully, be more certain about conclusions we reach.


Trading Russian stocks

Trying to spark some interest towards the topic, it’s obviously necessary to expand on the how individual investor can access Russian stocks.

Basically, there can choose between following options:

1) Trade Russian companies listed on American Exchanges. Those include: Michel steel (NYSE:MTL), Mobile TeleSystems (NYSE:MBT), Vimpel-Communications (NYSE:VIP), Wimm-Bill-Dann Foods (NYSE:WBD), CTC media (NASDAQ:CTCM) and numerous companies traded OTC or as ADRs;

2) Trade Russian-focused ETFs:

          a.  RSX: mostly exposed to Russian O&G industry;

          b.  RBL: industrial materials and energy make up more than 60% of the holdings;

3) Theoretically, you can find either a Russian broker licensed to work with non-residents, or an American broker licensed to work on Russian exchanges. Practically, this option seems to be beyond typical investor’s reach, since high transaction cost and Russian non-resident capital gains taxes will dramatically affect your performance.

In the view of above, in subsequent posts we will focus on telecommunication industry and metal producers, as those stocks are relatively easy for American investors to get exposure to and are largely uncovered by English-speaking media and financial community.

Below you can find links to the sources used in this posting and web-portals, which might come in handy to those looking to analyze Russian market by themselves.



Comprehensive resources in eng:

Related articles:

Excel files with the data used are available on demand.

Disclosure: No positions