The Russian stock market staged its worst performance in 2011 since the credit crisis in 2008, falling around 20 percent on fears Europe's woes would spread and political unrest in Russia will continue. The rouble-traded MICEX index and the dollar-based RTS gave up nearly 17 and 22 percent, respectively, on the year, although they rose 1.1 and 1.2 percent on Friday.
The last time a yearly fall this large was recorded was in 2008 when the MICEX fell 67 percent and the RTS fell more than 72 percent, before rebounding through 2009 and 2010. "We were hit by a wave of unexpected events - unknown unknowns," said Roland Nash, chief investment strategist at hedge fund Verno, citing the earthquake in Japan, the European debt crisis, fears about US growth and political unrest in Russia.
"It seems that every month something new was coming out," Nash said. "Events outside the country overwhelmed the Russian story and that's what has driven the market." Russia is typically compared with so-called BRIC countries - Brazil, India and China. Brazil's Bovespa and India's Sensex are also sharply lower this year, down 18.1 percent and 24 percent respectively, while China's SSE Composite index finished the year down nearly 21.7 percent.
The rouble firmed 0.3 percent to 32.15 against the dollar but eased 0.4 percent to 41.74 versus the euro . Versus the euro-dollar basket, the rouble was steady at 36.46. In 2011, the rouble lost 5.2 percent of its value versus the dollar, recording the worst result since 2008 when it was devalued by nearly 25 percent. Capital flight was the main reason for the currency's weakness despite an average price for oil, Russia's key export, at $111 per barrel.
A recent poll said capital is expected to continue to bleed in 2012. Russia lost nearly $80 billion in capital outflows in 2011, linked partly to uncertainty around who will come to power next year and to street protests alleging election rigging. "Investments in shares are rather risky, political risks should be applied to them, while the currency is vulnerable to the state of the balance of payments," said Evgeniy Nadorshin, chief economist with Sistema, Russia's largest listed conglomerate.
Russia's 30-year benchmark Eurobonds saw yields peaking after Standard and Poor's cut the US rating in early August. However, yields during 2011 have declined to 4.68 percent from 4.84 percent, indicating less aversion towards Russia's debt/ Analysts at Goldman Sachs said earlier this month that the BRIC countries might already have passed their peak in potential growth.
The latest Reuters monthly poll showed the Russian economy will slow to 3.2 percent in 2012 from around 4.2 percent this year, while capital outflows will continue to cast a shadow over the economy and the rouble. "Overall, 2012 will be worse than 2011 in terms of economic growth and the rouble's performance," said Nadorshin at Sistema.
"If there is a trend towards a firmer rouble, it will be of a temporary nature. In the second half of the year it would be sensible to expect its weakening," he said. On the flip side, the Russian market now looks cheaper than a year ago, which could provide an investment opportunity, assuming that commodity prices remain high.
"With the oil price above $100, the Russian economy looking reasonably good, expectations very low and prices low... that seems to be a pretty good combination for Russia," said Nash at Verno. The Russian stock and currency markets will reopen on Tuesday January 3. It will be the first time since the fall of the Soviet Union that the markets are open during Russia's traditional 10-day New Year holiday. The change is part of the government's ambitious plan to transform Moscow into an international financial centre by 2020.
Analysts at Alor brokerage said in a note that trading would likely be thin at the start of the year but investors would be keeping an eye on the news nevertheless. "Investors will be waiting for important events, such as the beginning of the publishing of full-year financial results in the United States."
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