Russia moves out of the red market focus

There may be doubts about human rights in the new Russia of President Vladimir Putin, but the prospects for investors appear increasingly positive during the months ahead. The rouble is stable, a lower and simplified tax regime has been approved by parliament, and official statistics released last month show gross domestic product growth of 8.5 per cent for the first half of 2000. “We are extremely optimistic for the rest of this year. It's really difficult to see any significant threat assuming the government remains committed to a tight fiscal approach,” says Alexei Zabotkin, economist with UFG in Moscow, who forecasts 6.2 per cent growth for the year.Standard & Poor's recently upgraded its Russian Eurobond rating to B-, Fitch IBCA is likely to raise its rating on Russia by the end of this month from B- to B or above, and Moody's is also studying the data closely. Alfa-Bank has just paid off its Eurobond, making it the first Russian issuer to fully honour its obligations in a against a backdrop of defaults by other corporate borrowers since the August 1998 financial crisis. Alex Knaster, the bank's chief executive, says Alfa is likely to seek new syndicated loans this year, and issue a fresh Eurobond before next summer in the wake of demand for foreign currency lending by its Russian corporate clients.Mr Knaster says a final decision will depend on a further drop in the cost of borrowing, itself hinged on progress in restructuring Russia's debts to the Paris and London Clubs. Following fresh openness on the subject from Germany, Russia's largest creditor, at the Okinawa G8 summit last month, that seems possible. Several other Russian companies are also considering a return to the bond markets, and Vimpelcom, a mobile operator, recently took the lead by launching new commercial paper with considerable success. On the equity markets, MTS, the leading rival Moscow-based mobile telecommunications operator, in June became the first Russian company to launch an initial public offering on the New York Stock Exchange, and was rewarded with strong investor interest. That just leaves one gap: the Russian equity markets. Most institutions outside the specialist regional and hedge funds are still steering clear. While analysts remain confident that the RTS index will rise to 300 by the end of the year, it continues to languish at around 200. There are some concerns that restructuring plans at the electricity utility UES, and the political threat of renationalisation of several groups privatised in the 1990s, might put investors' rights in jeopardy. The next few weeks will show if these fears are unfounded.