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Russia: Can The Stock Market Continue To Roar?

By Stephanie Baker -

Moscow, 22 October 1997(RFE/RL) - Russia's feverish stock market is still rising, but there is a chorus of voices saying the days of fast, easy money are over, and even some grumbling of a nose-dive on the horizon.

Russian shares have skyrocketed by nearly 185 percent so far this year, outpacing even the giddy gains of 140 percent in 1996. Russia, which was named best performing emerging market last year by the International Finance Corporation, could easily win the honors again this year.

But there are doubts about whether shares can continue racing ahead. Many market players believe the days of triple-digit gains are over as the market, capitalized at more than 100,000 million dollars, slows down to reflect the bottom line.

Petru Vaduva, head of equity research at Renaissance Capital, says the market is slowly but surely becoming more "mature," which means that investors will be looking more for companies that have reported positive earnings. He predicts that the market could rise up to 30 percent over the next six months, as long as the political situation remains stable.

Rising capital inflows, indicating a slow-down in capital flight, is likely to help maintain a healthy demand for what remains relatively little in the way of shares on offer in Russia's illiquid market. Demand also is being pushed up by domestic players, such as Russian banks eager for a slice of the profitable equity market given the declining yields on government securities.

But despite new sources of funds, growth expectations over the next six months are more modest, fueled by the belief that many Russian shares no longer look cheap after the year-long market rally.

For the true bears, this means a correction lies ahead. John-Paul Smith, Russian equity strategist at Morgan Stanley in London, says that most companies are overvalued, which could lead the market to fall eventually by 30 percent.

Although few are as bearish as Smith, many agree that disappointing corporate earnings are beginning to weigh the market down.

Many companies are beginning to produce accounts according to international standards, but investors are still by and large looking at corporate reports based on Russian accounting methods which tend to overstate earnings. Barter - estimated to make up more than 40 percent of all transactions in the economy - is on the books as income. At the same time, accounts often reflect goods that haven't been paid for. Some market watchers believe that there are many bad debts that have not been accounted for.

But in Russia the market boom has been fueled largely by the enormous potential the companies exhibit, rather than tangible earnings.

For now, gauging the value of a company remains deceptive, encouraging what some believe is a highly speculative market where foreign players call the shots. Given the foreign dominance, the market is perhaps even more sensitive to the whims of Wall Street than the vagaries of the Russian parliament, which has tried to unseat the government over its economic reforms.

Smith says that if Wall Street were to have a big fall, Russia would be the worst affected of all world markets. But the investor mix in the market looks set to open up as Russia joins the ranks of "normal" emerging markets. It is expected to be added to the International Finance Corporation's Investable Composite Index on November 3 and included into the Morgan Stanley Capital International Market Free Index on November 28. Over the long-term, the indices are expected to persuade international investors pour more money into Russia.

Two developments could provide a boost the stock market: if the economy starts to grow and if tax reform passes the State Duma.

Despite signs of the economy stabilizing this year, companies are still being squeezed by the non-payments crisis and an archaic tax system, which the government is trying to overhaul.

If the government's proposed tax code - which reduces the tax burden - gets through the Russian legislature, analysts say corporate earnings next year could get a boost.

Meanwhile, the government is predicting 2 percent growth in 1998, which could breath new life into enterprises and broaden the market, which has been dominated so far by oil, gas and telecom companies.

Many believe manufacturing enterprises that produce machinery and equipment could take off. For the intrepid investor, there are many little known companies that are poised to profit from the hoped for economic recovery.

For the long-term, most believe the Russian market will continue to grow. But in the near-term, uncertainty lingers.