TRUTH & BEAUTY: Madness in Moscow! Try not to panic

By bne IntelliNews August 8, 2008

Eric Kraus of Otkritie Investment House -

T&B is frankly bewildered! When we began drafting the current issue, the Russian market was in the process of finally catching up with some of its global peers - alas, to the downside. This sell-off looked like nothing more than the typical exacerbated volatility of a market which is largely the appanage of traders rather than long-term investors. Nothing unusual there.

Then the bottom fell out of the bucket!

Efficient-markets nonsense aside, real-life financial markets can be irrational, at least in the short-term. That said, before accusing them of a momentary departure from reality, one had best check to see whether there is something seriously amiss. We dove down for a closer look, but came up empty-handed:

• The macros are excellent - even inflation is trending down.

• Our macro assessment is confirmed by the fact that the rouble is strengthening, the banking sector is growing, while Russian fixed income goes from strength to strength, despite the global flight from risk.

• Corporate profitability remains well above the emerging markets average.

• There is no visible domestic political turbulence.

• Commodity prices are coming off, but nowhere near enough to justify the carnage.

• Oil prices have given up 3 months of gains, but remain in a long-term uptrend.

• The Global situation is pretty dreadful, but again, Russia has decorrelated -- in the wrong direction.

Therefore, we are left with Mr. Putin's unkind remarks about one metals and mining oligarch (who clearly had it coming), as well as attempts by the formerly-toothless Anti-monopoly Commission to start cracking down on certain abuses of dominant market positions, especially in the commodities sector, where aggressive pricing is damaging Russian attempts to move up the value chain. In most other countries, investigations for price-fixing are seen by the markets as matters of law enforcement, not as a fundamental shift in the economic regime...

In short, either T&B has totally lost the plot - or the market has. The amount of sheer nonsense we have heard in the last 48 hours sets our hair on end. In particular, five years after, a surprising number of investors still have not understood what the Yukos debacle was all about. Despite there having been something like 30 false-Yukos scares, people continue to trot out this particular scarecrow at regular intervals.

The Mechel affaire has no more to do with Yukos than with the War of the Spanish Succession! It is the result of a plea from the steel majors for the government to do something about price gouging by the miners. With Russia embarking on a massive project to rebuild its dilapidated infrastructure, we expect to see further measures to favour domestic steel producers, including limitations on the export of scrap, along with a sharp restriction in the use of transfer pricing (which favours export of Russian minerals at the expense of the domestic steel producers).

We hereby offer a bet to all comers that, in six months time, this affaire will be totally forgotten. Mechel will, at worst, pay a fine amounting to one percent of its annual sales, and life will go on much as before.

Black spot of inflation

As inflation has been THE black-spot on an otherwise extraordinary economic performance, the fact that the Anti-Monopoly Commission is finally showing some teeth should be welcomed. If something is amiss, it is the chronic inability of the Russian government to properly communicate its intentions and the motives behind its actions. A quick look at your Bloomberg "Ni Russia Mechel" will show that there have been any number of reassuring statements, but they have gotten lost in the general cacophony. It would be refreshing if the government would appoint one public spokesman on economic policy, with everyone else requested to shut up. That said, one would have thought that, by now, investors would have grown accustomed to this habitual clumsiness, and would heavily discount the occasional inflammatory statement. Apparently not.

In any event, the irrationality of the market reaction is clearly demonstrated by the fact that the mineral extractors (e.g. Mechel, RASP - who will presumably have to lower their domestic prices) have been affected no worse than have some of their customers (e.g. MMK, NLMK - who will obviously benefit!)

Investing in Russia still takes solid nerves. Regular readers will know that, given the global context, we have been bearish for some months. We now think that prices are so far below any reasonable value that the market has only one way to go, and - holding our breath - we would now recommend investors begin to cautiously reposition into the equity market.

As we go to press - the market has managed to frighten its own (very limited) wits out with the fear that "they" were "going after" the oil companies. This is truly insane. You cannot complain about monopoly behaviour in Russia, then panic when the government tries to do something about it! The market is now several percent cheaper than this morning - great! We are not usually this affirmative, but this is a buying opportunity, at least near-term. There is blood in the streets...

Happy Trading _ _

Send comments to The Editor

TRUTH & BEAUTY: Madness in Moscow! Try not to panic

Related Articles

Drum rolls in the great disappearing act of Russia's banks

Jason Corcoran in Moscow - Russian banks are disappearing at the fastest rate ever as the country's deepening recession makes it easier for the central bank to expose money laundering, dodgy lending ... more

Kremlin: No evidence in Olympic doping allegations against Russia

bne IntelliNews - The Kremlin supported by national sports authorities has brushed aside "groundless" allegations of a mass doping scam involving Russian athletes after the World Anti-Doping Agency ... more

PROFILE: Day of reckoning comes for eccentric owner of Russian bank Uralsib

Jason Corcoran in Moscow - Revelations and mysticism may have been the stock-in-trade of Nikolai Tsvetkov’s management style, but ultimately they didn’t help him to hold on to his ... more

Register here to continue reading this article and 2 more for free or 12 months full access inc. Magazine and Weekly Newspaper for just $119/year.

If you have already registered, enter the information below with the same email you used previously and you will be granted immediate access.

IntelliNews Pro subscribers click here

Thank you. Please complete your registration by confirming your email address. A confirmation email has been sent to the email address you provided.

Thank you for purchasing a bne IntelliNews subscription. We look forward to serving you as one of our paid subscribers. An email confirmation will be sent to the email address you have provided.

To continue viewing our content you need to complete the registration process.

Please look for an email that was sent to with the subject line "Confirmation bne IntelliNews access". This email will have instructions on how to complete registration process. Please check in your "Junk" folder in case this communication was misdirected in your email system.

If you have any questions please contact us at

Subscribe to bne IntelliNews website and magazine

Subscribe to bne IntelliNews website and monthly magazine, the leading source of business, economic and financial news and commentary in emerging markets.

Your subscription includes:
  • Full access to the bne content daily news and features on the website
  • Newsletters direct to your mailbox
  • Print and digital subscription to the monthly bne magazine
  • Digital subscription to the weekly bne newspaper

IntelliNews Pro subscribers click here

bne IntelliNews
$119 per year

All prices are in US dollars net of applicable taxes.

If you have any questions please contact us at

Register for free to read bne IntelliNews Magazine. You'll receive a free digital subscription.

If you have already registered, enter the information below with the same email you used previously and you will be granted immediate access.

Thank you. Please complete your registration by confirming your email address. The confirmation email has been sent to the email address you provided.

IntelliNews Pro offers daily news updates delivered to your inbox and in-depth data reports.
Get the emerging markets newswire that financial professionals trust.

"No day starts for my team without IntelliNews Pro" — UBS

Thank-you for requesting an IntelliNews Pro trial. Our team will be in contact with you shortly.