May 17, 2008

Bullish on the Bear's Markets

From a recent article in the Wall Street Journal, comes an insider appraisal of the current situation faced by Russia’s financial markets.

Authored by Alexander Potemkin, President of Micex (Moscow Interbank Currency Exchange), the piece gives us an idea of the staggering growth and maturity occurring in Mother Russia’s economy.

“There is much discussion -- inside and outside Russia -- about our country's potential as an economic power and the remaining challenges we face. In many respects, the development of Russia's financial markets mirrors the nation's overall path and ambitions.”

Russia must build a strong infrastructure in utilities, transportation and law as the foundation for a 21st-century society, just as we must build trading and technology systems to attract the investment needed for a 21st-century economy. The country must create sustainable legal and political institutions, just as we must build strong mid-cap companies that are leaders in innovation to overcome our dependence on natural resources. Finally, we must continue to build trust in our country, just as we must build trust in Russian business and confidence about the economy among our trading partners and investors.”

Sounds good so far, but give me some meat on those bones Alexander.

“In economic terms, Russia's burgeoning financial sector is proving to be one of the main engines for the country's transformation. The goal is to establish Moscow as an international financial center, similar to London, New York and Tokyo.”

Ok, now we are getting somewhere, the root of Russia’s ambition laid bare for all to spy.

“In 1992, Russia had more than 1,000 stock exchanges. Most of these existed in the form of wholesale operations similar to medieval markets. Today, the market has consolidated into two main exchanges: The RTS Group and the Moscow Interbank Currency Exchange, or Micex Group.”

One thousand stock exchanges, wow, you don’t hear that every day. I guess we could say that their financial markets at the time were, shall we say, fragmented.

“In 2007, Moscow was named one of Standard & Poor's top 10 global economic centers. Average daily volume on the Russian stock exchanges has increased almost ninefold over the past two years and now stands at $5 billion to $6 billion a day. The IPO market has been one of the most active globally, with the $8 billion debut of VTB Bank's shares ranking as the world's largest in 2007. Russian companies were fourth in the world in terms of capital raised last year.”

Impressive growth, no doubt about it.

Is this the beginning of Russia’s ascendancy as a global financial hub, or just a liquidity bubble spurred by mega oil dollars?

Only time will tell of course, but with ambitious and stable political leadership in place, and with oil prices continuing to rise with no sign of abatement in sight, the future looks bright for the continuing evolution of Russia’s financial markets.

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