From bust to boom in just 10 years
Alexander Pertsovsky
For anybody who lived through it, August 17, 1998, will remain seared in the memory. It was, by some measures, the single biggest financial write-off in history. First, the announcement that the government of Boris Yeltsin would default on $40bn. Second, that the rouble would no longer be supported, signaling a 50pc devaluation before the end of the month. Third, the declaration of a moratorium on banks repaying their foreign debt, effectively forcing most of the banking sector into receivership.
The irony of the 10-year anniversary of the August 1998 crash is that the biggest danger to Russia's credit markets and asset prices is the fallout from a crisis in the developed world.
This may seem a bold statement given the 25pc decline in Russia's equity market in the last two months. Many have blamed the decline on events in Russia, and certainly the volatility of the equity market has caused skittish global investors to re-evaluate their perception of risk. But as the last 10 years have proved, the only thing more volatile than the markets is the sentiment of investors toward Russia. In 1998, when the market was at its cheapest, Russian equity was commonly described as "toxic waste". Four years and a gain of 300pc later, Russia's equity markets were hailed as the "best performing in the world". At the beginning of this year, many called the country a safe haven for global capital. Now it is considered high-risk. Meanwhile, earnings and the economy have performed largely in line with the market's expectations. I am confident that at some point in the next 12 months, Russian equity will once again be the darling of the investment world.
I believe that the recent decline is a painful dip caused mainly by a sharp fall in the oil price. After all, Brazilian equity has fallen by 27pc from peak to trough this year, and Saudi Arabia is down 29pc. The main lesson from the experience is not that Russia has something uniquely wrong with it, but rather it is now inextricably linked with global markets.
The resurrection of Russia's financial system from a bankrupt pariah to an integral part of world finance has been perhaps the most extraordinary recovery story in global finance of the last 10 years. Tremendous value has been created. In the aftermath of August 1998, it became theoretically possible to buy the entire Russian equity market - including all the natural resources of Gazprom, the oil sector and Norilsk Nickel - for $50bn. The equity market as a whole is now worth more than $1 trillion at market value, and probably closer to $2 trillion if developed markets were not so gloomy.
As remarkable as the growth in value has been the spontaneous development of the country's financial markets. Russia's equity market turnover frequently reaches $7bn a day, making it one of the most liquid in Europe.
More recently, an increasingly sophisticated futures and options market has developed. Turnover on the RTS Futures market is now in excess of $2bn a day, which is more than that of the CAC or DAX futures turnover in France and Germany.
The brave decision to open up Russia's capital markets in July 2006 turbo-charged the development of Russia's financial markets to allow them to play a role concomitant with the country's growing clout in the global economy.
So what about the next 10 years? The recent weakness has been ugly and is a reminder that financial markets never move in a straight line. At the same time, during a period of weakness, it is always important to keep an eye on the bigger picture. Russian asset markets remains locked into what is fundamentally a long-term, secular bull market. The shift in economic power from the West to the East is something that will define the next 10 years as much as it has the last decade. The growing economic muscle of China and India is virtually unstoppable. Globalisation is driving the flows of capital and technology to power the catch-up of these economies with Europe and the United States. The demand for what Russia has to offer, from natural resources to technology, will therefore only grow, placing Russia in a fantastic position to play its historic and geographic role as the link between West and East.
While portfolio investment may have been cautious about Russia in recent months, longer-term investment is higher this year than ever before.
Moreover, the International Monetary Fund forecasts that Russia will have a $3.5 trillion economy by 2013, or roughly twice the estimated size it is today. To meet the demand for capital that these numbers imply, Russia's financial markets are going to have to expand in both size and sophistication at rates not dissimilar from what we have seen since 1998.
It may seem faintly ridiculous to predict that, in 10 years, Moscow could be spoken of as a financial centre capable of competing with London or New York. But it would sound a lot less ridiculous than if we had predicted 10 years ago on August 19, 1998, the success that Russia has attained today.
The author is CEO of Renaissance Capital financial group. This text was originally published in the Moscow Times.
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