The YUKOS affair may have cast a shadow over the investment climate in Russia, but investors still love Russian bonds and are holding on to select growth stocks they see as extremely good bargains.
Though concerns linger, the controversial judicial campaign that has driven oil major YUKOS to the brink of bankruptcy has done little to change investors' belief in the value of local stocks, dollar-denominated Russian debt and the rouble.
"I think investors are making the assumption that this (YUKOS) is a focused case and not a general attack on the business community," said Roger Monson, emerging Europe equity strategist at CAIB International Markets in London. For a Reuters poll on investment in Russia click on.
The campaign against YUKOS over tax arrears is widely seen as Kremlin retribution for the political ambitions of the company's now jailed main shareholder, Mikhail Khodorkovsky.
Bailiffs told YUKOS on Wednesday to immediately halt sales of its 1.7 million barrels per day in oil output in a move likely to hasten the collapse of Russia's largest oil firm.
But strategists said the roaring success of Russia's first investment grade bond sale on Friday showed that the massive investor appetite for Russian assets had not diminished. Gazprom, the world's largest natural gas producer, sold $1.25 billion of BBB-minus rated bonds at a yield of 7.201 percent. The deal attracted orders worth some $6.0 billion.
Russia's improving macroeconomic fundamentals and foreign exchange reserves swollen by soaring crude oil prices have convinced bond investors that Moscow is able to service its debt obligations.
That confidence is mirrored in the sharp fall in risk premium on Russian debt since the default of 1998.
Yields on benchmark Russian sovereign dollar bonds due 2030 have plunged to about 8.1 from 17.4 percent in March 2001.
"At the end of this year, Russia will have negative net debt and macroeconomics (that are) very strong. The impact of YUKOS on sovereign risk is very marginal," said Jerome Booth, head of emerging market research at fund management group Ashmore.
The latest monthly poll conducted by J.P. Morgan showed that investors were keeping their big overweight exposure to the Russian rouble, despite concerns about YUKOS and the health of the country's banking system.
The impact of YUKOS on the stock market is more direct but most investors find Russian valuations too tempting. "You have valuations in the equity market that place Russian stocks at 8.0 to 8.5 times next year's earnings and an economy that has lot of strengths," said CAIB's Monson.
By comparison, stocks in other emerging markets like India are forecast to trade at a price-earning ratio of around 12, while those in more mature markets like the United States trade at ratios of about 17.6, according to data from Reuters 3000 Xtra.
"At the moment, four or five of the world's largest oil companies are Russian and, if oil prices stay high, Russian securities will obviously be in demand," said Ehrmann, who is overweight on Russia, the world's second largest oil exporter.
Apart from the large energy and natural resource sector, investors see fast-growing Russian telecommunication companies as attractive buys. "Valuations of some telecom companies, particularly mobile phone companies and alternative carriers are reasonable when compared to other emerging market securities in this particular sector," said Philip Ehrmann, head of emerging markets at Gartmore Investment Management in London.
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