Although we believe that recent anti-government protests in Russia have been of a relatively mild nature, potential changes in Russia’s political landscape mean that a higher political risk premium will likely be applied to its equities, at least in the short term. Figure 1 (please see report) demonstrates how since 4 Dec a jump in Russia-risk aversion has led to a spike in the spread between 5Y CDSs for Russia and Brazil (two commodity markets). Since Russia’s parliamentary elections MICEX has dropped 11.5% vs a 5.9% decline on MSCI EM, while Urals Med had retreated 5.7%. MICEX sector indices have lost 10.4-12.8%, with utilities among the worst performers (-12.4%), likely on fears of further restrictions on tariff growth. It is interesting to note that over 2000-10 MICEX on average gained 3.9% MoM in December vs averages of 0.3% in October and -0.1% in November (including 2011). Furthermore, oil prices remain elevated with the RTS Index/Oil price ratio presently standing at 13.1, slightly below 1 standard deviation from its long-term average of 18.9.
We believe that following the next planned demonstration on 24 Dec, the intensity of the Russian protests should diminish as we enter the extended holiday period. Assuming the absence of any major negative news flow from Europe (and given that the Mar 2012 presidential elections are still several months away), we believe that the Russian market could stabilise and, from a technical viewpoint, may offer short-term upside potential.
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