Market Blase at Yeltsin Victory

So, it happened, He won. The political doubt has vanished, or a chunk of it, anyway. So where's the stock-market boom? Where's the wall of money? Where are the scores of institutional investors who said they would pile into Russia the moment President Boris Yeltsin was re-elected?


On Thursday, the day after Yeltsin beat Gennady Zyuganov, Russian equity investors were given a lesson in how to play a volatile stock market. Bleary-eyed after a late-night TV vigil, Muscovite traders were met at work with a barrage of calls from Russian clients to buy anything even remotely resembling a domestic stock. The word was that once Western Europe arrived at work two or three hours later, serious money would move into Russia's tiny equity market, pushing prices "to the moon," in the words of one trader. As London and Paris were commuting, Moscow's midmorning buying frenzy hiked the most liquid corporate and second-tier securities 15 percent.


But the Western money was unimpressed. City traders scanned the headlines, calmly fetched some coffee, called their Russian brokers and sold. Western investment banks holding Russian stocks made a killing, earning huge ovenight returns. As London and Paris ate profits for breakfast, Moscow's stock market stomached a lunchtime plunge.


Dinnertime brought a sigh of relief. During the afternoon the market recovered, closing 6 percent up on the day. Russian investors who had kept their nerve at lunchtime ended up making money anyway. But the Yeltsin victory sparked only a modest stock-market gain. What's more, the widely touted post-election stock-market upside may be more of a gradual climb than a summer surge.


American Independence Day meant Friday was the first time New York could impose its view of the election result on Russian stocks. Trading was slow, the market sluggish -- The Moscow Times index ended the day slightly down. As Yeltsin's re-election prospects have improved over the last 12 months, prices have risen. By the time of second-round voting, Yeltsin looked such a safe bet his victory had been almost entirely "discounted" -- when he actually won, the market hardly moved.


Since July 1995, the power-generating and telecommunication sectors have led the pack -- prices have risen 150 percent and 110 percent respectively. Oil and gas stocks have grown just over 100 percent. "Blue chip" shares in these sectors were seen as seriously undervalued: Either share prices were low compared to market potential -- in the case of Mosenergo, Irkutskenergo and Rostelekom, for instance -- or the company held proven natural resources -- such as in the cases of LUKoil, Surgutneftegaz and Gazprom. These companies have driven the market recovery: even excluding the Gazprom natural gas monopoly, Mosenergo, Irkutskenergo, Rostelekom, LUKoil and United Energy Systems account for more than half of Russia's stock-market capitalization. Other sectors' gains have been more modest; over the same period, non-ferrous metals rose 41 percent, shipping 17 percent, pulp and paper 6 percent and ferrous metals 5 percent.


Although the only certain thing in Russia is uncertainty, most analysts expect the rise of Russia's stock market to continue in the autumn. The upward bias should result from increased interest in Russia among foreign investors and a limited supply of shares. The government has suggested it will sell off holdings in 13 primary companies before the end of the year, easing supply constraints. But new equity issues take time and are highly politicized. Quality stocks will remain scarce.


Several other factors will nudge the market upward. One is the steady release of share derivatives, especially American Depository Receipts, or ADRs. LUKoil, Mosenergo, GUM, Seversky Pipe factory, Chernogorneft and Tatneft have issued ADRs, meaning their equity can be traded on the New York stock exchange indirectly. Several other firms are waiting to issue: two are Menatep and Inkombank. By the end of the year, a dozen Russian stocks could boast ADRs.


Perceptions of Russia's stock market infrastructure should also improve. The market will he reassured by the availability of 17F-5 custody services approved by the U.S. Securities and Exchange Commission. Morgan Stanley has signed up with Credit Suisse to provide custody services and Chase Manhattan and ING may soon join them. Yeltsin has endorsed a plan to develop Russian share registry and custody services further. The emergence of domestic "mutual funds" should also push prices by increasing market demand among Russian players. Mutual-fund legislation is on the statute book, and the Federal Securities Market Commission expects to issue half a dozen licenses by early 1997.


But the price-bubble could easily be burst by one or two negative shocks. A widely held view is that the equity market will benefit when yields on treasury bills, or GKOs, come down. Reduced political pressure and increased tax revenues mean GKO yields will soon fall, the argument goes, channeling domestic money into equity. But this view can be challenged. If and when yields do come down, there will be a series of bank failures, which could easily become a banking crisis, unnerving foreign-equity investors. Liquidity-strapped banks have to dump their equity holdings, pushing prices down further.


The ruble is another problem as it felt the strain of pre-election spending and raids by the president on the Central Bank's hard-currency reserves. The authorities are trying to realign the ruble gradually, decreasing the exchange-rate band monthly until December. But the rouble may still fall, and upset equity investors no end.


In 1989, Francis Fukuyama, an American academic, said the fall of communism would mark "the end of history." Although he deliberately overstated his case, it is true that the 20th century has been a struggle between two competing ideologies: the market knows best on the one hand, and the state knows best on the other. Yeltsin's victory proves that communism is ideologically bankrupt. So one could say that Wednesday was the end of history, the market's lap of honor after a long and bitter struggle. It was therefore a letdown when The Moscow Times index could only manage a paltry 6 percent rise.