Russian markets rally on election and oil price fever

Things are rosy for Russian markets with a great start to the year. The stock market has outperformed the rest of the world, up 24% since December. The rouble is also at a 6-month high, inspiring both economists and market watchers.

Russia looks to be on the rise, while some of its Western neighbours could be sliding further into recession, but caution is still in the wind.

“We’ve seen quite significant rally on the Russian market for the last week or two,” Hawk Sunshine from IFC Metropol told RT. “I think it would be a mistake to say this rally is because of increasing confidence about elections. It’s likely to be part of it. But significant increasing oil prices played a very material role.”

The positive background has also increased capital inflow. “Russia funds are now picking up net inflows on a consistent basis, while other big EM country funds are reporting more modest inflows or net redemptions,” reports Chris Weafer from Troika Dialog. Last week, Russia retail country funds reported a net inflow of $111mln, or 0.75% of AUM, according to Mr Weafer.

“The steady pickup in new money inflow is due to both the upward trend in the oil price and a continued decline in political risk perception,” he pointed out.

As for Russian balance sheets, they are considered a good example not only for emerging markets, but also for developed countries. Government debt was slightly over 11% of GDP at the end of last year, comparing to around 82% in Germany and 100% in the U.S.

The International Monetary Fund expects the country’s economy growth to slow to less than 3.5% in both this year and in 2013. But Jim O’Neill, the Chairman of Goldman Sachs Asset Management who invented the term BRIC, wrote in his latest book that even without “dramatic growth rates,” Russia has the potential for higher per capita GDP than the other BRICS and “all other European countries” in the next decades.

However, the experts are warning that future growth depends on serious reform. The current policy of heavily taxing and controlling oil and gas companies threatens to hurt Russia's investment climate, they say

Experts agree that rising oil prices helped Russia to improve its balance sheet last year, but the country could be pushed into recession in the case of sudden prices drop. Currently Russia needs $117 per barrel to break even, if the price falls to $90 it would face budget deficit of as much as 2.4%.