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Political Uncertainty In Russia Has Investors Nervous

The ruble-based stock index has fallen by more than 10 percent
The ruble-based stock index has fallen by more than 10 percent
MOSCOW -- In normal times, there is nothing better for a Russian business than to have Prime Minister Vladimir Putin as an ally. But these are far from normal times.
In the wake of the disputed December 4 parliamentary elections and the ensuing street protests, investors are balking at the political instability and uncertainty by pulling stakes out of Russian companies. And the hardest hit companies are those with the closest ties to Putin.
One of the hardest hit has been the gas company Novatek, which is partially owned by the prime minister's close friend and trusted ally, Gennady Timchenko. The company has lost 10 percent of its value since the elections, emerging the biggest victim in a sell-off of shares in companies close to the Kremlin.
Igor Nikolaev, director of the strategic analysis department for the consultancy firm FBK, says investors have been alarmed by the specter of political instability.
“Investors took it as an extremely negative signal when they saw that people do not agree with the falsification of elections on that scale," Nikolaev said.
Putin's Perceived Weakness
Such investor nervousness has reverberated through Russian stock markets since the elections.
Analysts say Putin's perceived weakness, which could lead the country in unpredictable directions, is troubling to investors who have viewed the prime minister as a guarantor of political stability.
Many investors fear that destabilizing political infighting could break out among the political elite and are trying to minimize their exposure. As a result, the ruble-based MICEX stock index has fallen by more than 10 percent and the dollar-based MSCI Russia Index has fallen by 13 percent since the election.
Investors took it as an extremely negative signal when they saw that people do not agree with the falsification of elections on that scale

Tom Mundy, the chief strategist at Otkritie Capital, says the state-run natural gas monopoly Gazprom, as well as utilities companies, were hit hard amid fears that Putin's plans to aggressively liberalize tariffs could come under threat. Likewise, oil firms Surgutneft and Transneft have also suffered due to concerns over how the political uncertainty will affect corporate governance.
Mundy adds that shares will continue to perform badly as long as instability persists.
“I think in the short term there is going to be a huge amount of news flow for the next two weeks at least, up until after Christmas, until December 27. I don’t think in that kind of environment you’re going to get capital inflows into Russia and I think it will put added pressure on outflows," Mundy says.
"It’s not the kind of environment where you commit long term capital to work in Russia. I think we have to get through this period of uncertainty in Russia before we do that.”
Investors do not expect the postelection protests to topple the regime. But Nikolayev says investor confidence largely hinges on how the authorities respond to them.
“If investors see that all this fizzles out and that the tactic of the authorities works -- the authorities are offering the public various projects such as having a supposed independent presidential candidate," Nikolaev said.
"They’ve again started talking about a new liberal-right party. The organization for 'Free elections' is being created partly by the authorities. If this manages to satisfy the protesters, then shares won’t fall like this.”
The opposition, which managed to bring tens of thousands onto the streets on December 10, are demanding that the State Duma elections be annulled and new ones scheduled. They are also calling for unregistered opposition parties to be allowed to compete.
The authorities dismissed these calls, but made a series of symbolic concessions earlier this week. For example, former Finance Minister Aleksei Kudrin, a close Putin ally, said that he would participate in creating a liberal party to appeal to the disgruntled young urban middle class.
Mikhail Prokhorov: a new Kremlin challenger
Mikhail Prokhorov: a new Kremlin challenger
Billionaire tycoon Mikhail Prokhorov, meanwhile, announced he would run against Putin for the presidency. Opinion is divided over whether Prokhorov's move is an honest attempt to challenge Putin or a Kremlin foil to divide and confuse the opposition.
More opposition rallies are scheduled in Moscow for December 24.
Mundy says that given the uncertainty, Putin -- who is required by law to abdicate his duties as prime minister after being formally registered as a candidate for president -- may try something dramatic.
“The other alternative is that Putin, looking at the instability in Russia, may not be willing to leave his hands off the reins [of power] for the four month period leading up to the March ballot," Mundy said.
"There is a neat trick -- Medvedev could stand down as president and Putin could come in as caretaker president. Then you would have a very neat, smooth transition through to the presidential ballot.”
Mundy and Vladimir Tikhomirov, chief economist at Otkritie Capital, published a widely circulated research note suggesting this possibility on December 14, prompting a curt denial from Putin's spokesman, Dmitry Peskov.
"The situation on the financial markets is a difficult one. Not all financial analysts manage to maintain mental sobriety," Peskov said.
"Putin continues to work as chairman of the government. If any events have an entirely campaign-related nature, he will take a vacation," he said. "But on the whole he will carry out his day-to-day duties as prime minister. He does not have to take any vacation."

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