Russian financial market: down, but by no means out

The Head of Russia's Financial Service estimates that the country's financial markets are now the twelfth largest in the world by capitalisation.

But despite their impressive growth in recent years, the Russian markets have been suffering in the last couple of months due to the U.S. credit crisis, but have not been hit as hard as many expected.

When global equity markets become unstable, investors typically pull out of the riskier areas and that tends to mean the emerging economies are among the first to suffer.

But an equities trader says that's not the case this time.

“In the past, when the U.S. would sneeze the rest of the world would catch a cold. Now it is not the case. We are in the process of a reversal of that statement. The U.S. is really not feeling so good, but all of it is not having such a dramatic effect on the emerging markets,” observed Kirill Yankovsky, equity sales broker at Aton Capital.

Andrey Klepach of Russia's Ministry for Economic Development and Trade was optimistic about Russia's resilience when he met with top economists on Wednesday.

“Russia is one of the most dynamic markets in the world, and has stable long-term prospects. We have a kind of ”air bag“ in the form of foreign exchange reserves which stand at US$ 413 BLN. We also have a significant budget surplus and although our banking sector is sensitive to foreign borrowings, its growing rapidly by 30-40 % per year,” explained Mr Klepach.

Though no-one can predict the extent of the fallout from the U.S. credit crisis.

“A lot of analysts are saying that as long as the U.S. does not show signs of obvious recession, we will be fine. I'd say that if we come close to recession numbers in the U.S., we will probably have a second or third wave by that time, and definitely some sell-offs in the market, as more and more people get more nervous. The most nervous people have already got out,” added Mr Yankovsky.

And when it comes to nerves, the U.S. currency also has a role to play.

The investment bank Troika Dialog says a major driver of Russia's economic growth is investment activity from state-owned companies, often financed by foreign borrowing in dollars. And if the dollar strengthens for a prolonged period, Russia's banking and corporate sectors are sure to suffer.