Ben Aris in Berlin -

The relatively unsophisticated capital structure of the Russian financial system means the ebb and flow of money has a strongly seasonal nature that is writ large on the domestic stock market. Russia's stock market usually rallies in the run-up to Christmas, but this year the party appears to have been called off.

Part of the reason is a banner holiday shopping season is sucking free cash out of the banking system as Russians use the festive season as an excuse to buy consumer goods they still miss and give them as presents: a washing machine for your wife is a perfectly acceptable Christmas gift in Russia, even if it wouldn't go down so well in the West.

For example, traditionally there's a big rally on the markets that runs between the last quarter of the year and continues to the end of the first quarter of the next year. Every year there is a usually a big sell-off sometime around Easter as banks close out positions to meet tax and reporting deadlines. Likewise, the market dips at the end of every month as banks are forced to free up cash so their customers can pay tax bills.

The RTS index has rallied strongly in recent months and shot through many analysts' end-of-year target of 2,300 following the announcement that First Deputy Prime Minister Dmitry Medvedev will almost certainly replace Vladimir Putin as the Russian president next year. However, hopes for the traditional end-of-year rally running through until the first quarter of next year are fading, as banks have been selling stocks to raise money thanks to the impact of the global liquidity crunch.

The Central Bank of Russia said that for the first time in years the value of securities held by Russian banks in November fell in absolute terms after they dumped RUB290bn (€8.1bn) of securities in October. Analysts say that banks are unlikely to return to the stock market before the end of the year and the traditional pre-New Year rally probably won't happen as a result. The October results were the worst since February 2006, the CBR said in a report. During the first months of the liquidity crisis, assets of the banking system rose 2.8% in August and 1.5% in September. Banks retained their investment portfolios in August and September, but began to sell in October.

Still lending

The silver lining is that the banks have used this money to maintain their lending activities, which have largely been unaffected by the problems in the US. Likewise, a recent report by Global Ratings showed that liquidity in the banking system over the crisis period starting in August was also largely unaffected, with volatility in cash supplies within the system being in line with the norm. The CBR has propped up the system by injecting some $9bn of cash in August and has since made at least another $20bn available by easing the rules. Now it seems that banks have made up whatever short fall remained by taking profits from their equity investments.

And the demand for cash to pay for Christmas presents by consumers is now bigger than the resources in the stabilisation fund. Russians spent RUB1 trillion on New Year presents in 2005 and RUB2.1 trillion in 2006. This year, they are expected to spend RUB4.2 trillion, which is more than the RUB3.6 trillion currently in the stabilisation fund.

Spending on Christmas presents has been doubling every year for the last few years. In 2005, the average Russian family spent RUB16,000 (€450) on presents - almost twice the average monthly salary at the time. But this rose to RUB30,000 in 2006 and is expected to top RUB50,000 ($2,000) this year, according to Kommersant Dengi. Part of the reason for these high numbers - which are on a par with many Western countries, if not more so - is that Russians are using the Christmas and New Year's holidays to buy many of the consumer goods that they still don't own.

And the math for banks is simple: investment in stocks this year has returned about 20%, but with interest rates on consumer loans running at between 28-30% in real terms, lending to shoppers is a more profitable use of money than investing in shares.

The traditional stock market rally has also been depressed by the brouhaha on international credit markets. With concerns still running high about a possible financial train wreck amongst the big international banks and a recession in the US, many international investors are thought to be holding back until they see the consolidated 2007 accounts for the biggest global companies before they decide on a new investment strategy for next year; usually but this time of year investors have a pretty good idea of what they want to do next year.

Send comments to The Editor