By happy coincidence, the breakthrough came just one day after the RTS (for Russian Trading System) index celebrated its 10th anniversary. It's a reminder of how far Russian capitalism has come in a decade: Back in 1995, when the economy had only recently emerged from 70 years of central planning, just 13 companies were included in the index, compared with 37 today. And it then stood at 100 points -- so anyone who bought and hung onto a basket of Russian stocks has enjoyed a handsome return indeed.
TIME MACHINE. Chances are, though, that few investors have been that farsighted or courageous. The RTS is notorious for its roller-coaster volatility. Got a time machine handy? Then zoom back to October 2, 1998, and fill your portfolio with Russian stocks. That's when the RTS hit its all-time low of 37.74 points following the spectacular financial crisis of August, 1998, when the economy looked set to return to the Stone Age. Yet since that low the RTS has delivered a fantastic return of some 2,300%.
Your time machine had better not overshoot, though: Just a year earlier, on October 6, 1997, the RTS reached a pre-crisis high of 572 points -- a level it didn't attain again until 2003. "In its first phase [from 1995 to 1998] the RTS was nothing more than a roulette wheel," says Chris Weafer, head of research at Russia's Alfa Bank. "There was no information, no transparency, no proper monitoring of financial flows, and no market regulation."
BANNER YEAR. Stung by the crisis, Russian companies have become much more conscious about reassuring investors through proper financial reporting. But while the past few years have been more stable, they've also seen their share of turbulence. Never more so than during the long-running "Yukos affair" of 2003-04, when President Vladimir V. Putin's dismantling of the Yukos oil company -- once the darling of investors in Russia -- sent a chill through the market and sparked fears of a more general reversal of the privatizations of the 1990s.
A glance at the RTS's performance over recent years puts the Yukos upset into perspective, though. Although the Russian market was subdued for most of last year, the index nevertheless ended the year 8% higher than it began. In fact, the RTS rose 71% from 2003 to the end of 2004.
This year looks set to be another winner. The RTS has been booming all summer, rising by 40% since the middle of May and by 48% since the start of the year. This follows reassurances by Putin that Yukos was a one-time event that won't lead to more renationalizations or attacks on private business. Investors seem happy to take him at his word.
It helps, of course, that Russia is raking in money because of record oil prices. Besides boosting the profits of Russian oil and gas companies (which account for some 60% of the Russian market's capitalization), sky-high oil prices also inject huge volumes of cash into the economy -- around $500 million each day -- fueling liquidity in the stock market.
WHIFF OF TROUBLE. Then there's the fact that for years, dragged down first by the 1998 crisis and then by the Yukos affair, Russian equities have traded more cheaply than their emerging-market peers, though that gap is closing. The RTS's performance has also been helped by the market's increasing breadth. In nonenergy sectors such as metals, telecom, and retailing, companies are growing fast and are eager to raise cash through IPOs, diversifying the market away from energy companies.
Also fueling growth and helping stability is the greater importance of local, as opposed to foreign, investors. Today at least 60% of the cash invested in Russian stocks is estimated to come from local sources, as speedy economic expanion and handsome oil profits bloat the cash balances of Russian companies, banks, and wealthy individuals. Local money is less likely than foreign money to flee the country at the first whiff of trouble.
ON A ROLL. Still, it may be a long time before investors in Russia can sleep soundly. Despite its growing breadth, their market is still heavily dependent on oil and gas, and hence on volatile commodity prices. Another thing Russia still sorely lacks is long-term institutional money from the likes of pension funds. Although the government has enacted a pension reform designed to encourage private saving plans, not much has been achieved in practice.
And the state of market regulation also leaves a lot to be desired. For instance, Russia still lacks any effective laws to prevent insider trading, which is frequently alleged.
Right now, though, the Russian market is once again on a roll, and investors seem willing to put their concerns aside. Certainly, if the history of the RTS's first 10 years is a guide, it pays to have strong nerves and put your money in Russia's young -- but rapidly maturing -- stock market.
Bush is a correspondent for BusinessWeek in Moscow