Updated August 27, 2008 

The political risks turned the Russian stock market into the cheapest market worldwide – the ratio of the companies’ capitalization to their forecasted revenue is lower as compared to the crisis of 1998. Only two factors can stop the further quotations’ drop: the stocks purchase by the companies or the large-scale interventions of Russia’s government.

On August 26, the Russian stock indices fell 4% within the first minutes after the exchange trades started. From 15.00 Moscow time, when Dmitry Medvedev announced the statement about the recognition of South Ossetia and Abkhazia’s independence, the quotations’ collapse intensified. The MICEX index lost 5,8%, RTS – 6,10%. "When president’s statement was announced, the hedge funds started closing the positions", as the director general for investments of Gazprombank Asset Management Company Andrey Zokin says. From 16.00 Moscow time, the stock indicators partly recovered, although there were no obvious reasons for the indices growth. "The situation was quite strange: there were neither internal nor external positive news", Uralsib trader Arno Kukk is puzzled. Still, this factor permitted the market to settle at – 2,09-4,16%. 

The Russian assets became the cheapest in the world, as experts state. As Renaissance Capital calculated, the ratio of the market’s capitalization to the forecasted revenues of the issuers (P/E) for 2009 was 6,1, thus in mid-May this index equaled 9,4. According to the calculations of Troika Dialog strategists, within "Yukos’s case", P/E was higher – at the level of 8,5, and during the crisis of 1998-2002 – at the level of 7. "The investors suppose that now the risk of investing into Russia peaked", as Renaissance Capital analysts on strategies Ovanes Oganisyan considers. Even in those countries, where P/E is traditionally viewed as low, the current values of the coefficient exceed the Russian level. "Turkey’s P/E settles at the level of 7, Hungary’s – 9,2, Korea’s – 9,5, Peru’s – 9,7", as Mr. Oganisyan calculated.

The investments in the Russian securities became quite risky. According to the last review of Credit Suisse’s analysts, now the basic bonus for a capital in stocks that asseses the overall risk of investments into the equity market (ERP), reaches the record mark of 7,7% for the last 8 years. 

If the relations between Russia and the West continue aggravating, the rating agencies will start revising Russia’s sovereign ratings. "In the mid-term and long-term prospect, Standard & Poor`s analysts can take the decision about the change of Russia’s loan rating", the head of Standard & Poor`s Moscow division Aleksey Novikov declared. Such agencies as Moody`s and Fitch don’t make such statements yet. "The tension of relationships with the West because of the recognition of South Ossetia and Abkhazia’s independence, doesn’t threaten Russia’s sovereign rating now, however the conflict escalation can result in the worsening of Russia’s image in the eyes of the foreign investors", as Fitch experts suppose. Thus, they underline that the tension intensification can result in the aggravation of the lending terms for Russian corporate and quasi-sovereign borrowers.

Only two factors can save the Russian market from the more severe collapse, as experts consider. The first one is the buyback by the Russian companies. Novatek and Norilsk Nickel have already declared about such opportunity. "The statements about the buyback can support the market from the psychological viewpoint and send the signal to the investors that the stockholders and the companies’ management care about the falling quotations’ dynamics", Alfa Capital asset manager Andrey Kilin is convinced. The quotations’ dynamics of Norilsk Nickel proves the positive reaction of investors to the statements of the ongoing buyback. Within two trading days, the MICEX index lost 5,95%, and the stocks of the metallurgical company grew by 0,58%. "Now the companies of the oil and gas and metallurgical sector have enough facilities to hold buybacks, and they can take advantage of this opportunity in order to avoid the future losses", the head of Renaissance Investments Management group for stocks management Anton Rakhmanov is convinced. 

The second possible scenario is the government support. "I think that the only thing that can help the market to recover is the intervention of the government", as the top-manager of one of the state banks is convinced. According to him, Russia faces the irreversible processes that have influenced both on the level of consumption, and on the liquidity drop. "There is no any global buyer at the market, and if the state doesn’t help the market under the actual threats of isolation policy, this negative factor will appear in the other sectors and first of all will result in the price drop at the real estate market", as the banker underlines.

On August, 26, the market already felt the state support, as the traders surveyed report: within the last hours of trades the stock indices recovered. "The interventions of the budgetary facilities can provide support by means of the assets buying-ups to the state banks’ balance sheets", the top-manager of the state bank explains. The market participants state that the high trades’ volume indicates the entry of the large player to the market, since the volumes are lower within the speculative game. On August, 26, the volume of trades was RUR 54,42 billion on MICEX, and the figure is higher than the daily average sum for the last two weeks (RUR 42 billion). The securities of the state companies felt the support: Rosneft stocks grew by 0,66% on MICEX, Gazprom – by 0,48%, VTB Bank’s securities that were falling by 10,5% during the day, lost only 1,47%, as per the trades’ results. 

Investors’ assessment of Russia’s stocks

PER – a ratio of a company’s capitalization to its net income per year

EPS – a ratio of a net income a year per stock

According to the data of ING Wholesale Banking