Russia Stocks World's Cheapest as Market Surges After Halt

By William Mauldin

Sept. 19 (Bloomberg) -- Russia's RTS Index, the best performer this decade, became the world's cheapest as the government halted stock trading for two days to arrest the worst financial crisis since the nation defaulted a decade ago.

Russia's RTS Index today jumped 11 percent after regulators opened the dollar-denominated RTS Stock Exchange and the ruble- denominated Micex Stock Exchange following President Dmitry Medvedev's pledge of $20 billion to prop up the market. Capital flight sparked by last month's invasion of Georgia, tumbling commodity prices, and the seizure in capital markets made Russia this quarter's worst performer among the 20 biggest markets.

The RTS Index, which surged more than 500 percent this decade, was valued at 5.6 times the earnings of its 48 companies before today, the lowest of the largest markets, data compiled by Bloomberg show. It fell 21 percent this week before authorities shut equity exchanges, while the Micex Index tumbled 25 percent.

``Closing the market was probably the only way you could arrest the vortex of despair into which the market has started to spiral,'' said Julian Rimmer, a London-based director at UralSib Financial Corp., whose asset management unit oversees $2.2 billion. ``At this stage, we're just telling clients to sit aside and watch. Any market that can fall so far so fast deserves a higher risk premium.''


The dollar-denominated RTS rose 11 percent at 10:44 a.m. in Moscow, its first gain in a week. The ruble-denominated Micex gained 18 percent. VTB Group, Russia's second-biggest bank, increased 40 percent, rising from a record low.

43% Decline

The RTS had dropped 43 percent from Aug. 8 through yesterday, when Medvedev strained relations with the U.S. by sending troops into Georgia, Russia's first major foreign offensive since the collapse of the Soviet Union in 1991. Crude oil slumped 18 percent in the same period, and 33 percent from a July record.

Foreign investors have pulled at least $35 billion from the nation's stocks and bonds since the five-day war in Georgia. The RTS, which surged 14-fold during Vladimir Putin's presidency from 2000 to 2008, fell 57 percent below its record high of 2,487.92 in May.

A doubling in the cost of borrowing dollars overnight and a tumble in oil sent the index down 11 percent on Sept. 16, the biggest slump this decade, prompting a halt in trading. After stocks extended their declines on Sept. 17, regular trading was suspended for the rest of that day and all of yesterday.

Increased costs for lending have also deterred speculative bets on equities. The MosPrime measure of overnight interbank lending rates reached a record 11.1 percent Sept. 17.

`Painful Exercise'

``The deleveraging of the market will no doubt continue to be a painful exercise, soothed only by the possibility of government intervention to restore confidence,'' Robert Procope, portfolio manager at Charlemagne Capital U.K. Ltd., wrote in an e-mail. ``In these circumstances it is impossible to call the bottom of the market.'' Charlemagne oversees $4.7 billion in London.

The tax cut announced yesterday for oil exports will save producers and refiners $5.5 billion, Finance Minister Alexei Kudrin said. Moscow-based Rosneft, the country's biggest oil company, climbed 23 percent in London. The company's dollar- denominated shares lost 43 percent in Moscow this year through yesterday.

$44 Billion Infusion

The Finance Ministry on Sept. 17 made $44 billion available for Russia's three largest banks, OAO Sberbank, VTB and OAO Gazprombank, as concern mounted that more financial companies will follow New York-based Lehman Brothers Holdings Inc. into bankruptcy.

Russia may also spend as much as 500 billion rubles on ``undervalued'' shares, including those of state-controlled companies such as OAO Gazprom, state news agency RIA Novosti reported yesterday, citing Kudrin. Moscow-based Gazprom, the country's biggest natural-gas producer, is valued at 5.6 times earnings, the lowest since at least January 2006, data compiled by Bloomberg show. Gazprom climbed 39 rubles, or 25 percent, to 199.50 rubles today.

The cheaper prices helped convince Tocqueville Asset Management to start a Russia-focused fund as a contrarian value play, according to portfolio manager Joseph Zock. Tocqueville, which oversees $8 billion, may start its Russia fund in 30 days with $10 million in assets from partners and a goal of $1 billion in total assets, Zock said yesterday in Geneva.

``There is so much that's working against Russia right now that it is an attractive market,'' he said. ``It is just getting more and more and more attractive.''

Russia is in a stronger position than in 1998, when it defaulted on its domestic debt, with gold and foreign currency reserves totaling $560.3 billion and the nation's economy entering its 10th consecutive year of expansion.

Still, some investors who say the government's measures may prop up the market while cheaper valuations lure back capital expect the rebound will be short-lived.

``Seeing the RTS at 1,500 or 1,600 in the short term is just not going to happen,'' said Carl Meurling, founding partner of Stockholm-based Emeralt Investments.

To contact the reporter on this story: William Mauldin in Moscow at wmauldin1@bloomberg.net.