Russia stocks reflect loss of confidence

Moscow: Russia's stock market is telling Dmitry Medvedev that investors are losing confidence as inflation accelerates and taxes curb profits of the nation's biggest oil producers.

Russia's RTS Index is off to its worst start to a year since 1998, when the government's $40 billion default sent equities around the world tumbling.

The 50 companies in the RTS, dominated by energy producers, through on Thursday traded at an average 9.52 times estimated earnings, the lowest among Europe's 10 biggest stock markets and a 29 per cent discount to the MSCI Emerging Markets Index, according to data compiled by Bloomberg.

The combination of the quickest inflation in five years and a 45 per cent increase in oil taxes spurred the benchmark RTS Index's 3.1 per cent decline this year. While former president Vladimir Putin presided over eight years of economic growth and a 14-fold increase in the RTS, Medvedev, his handpicked successor, inherits a stock market that's performing worse than Brazil, Mexico, Taiwan, and South Africa.

Big challenge

"For the new Medvedev-Putin administration, inflation is the biggest challenge," said Ian Hague, founding partner at Firebird Management in New York, which has $1.5 billion of its $3.5 billion emerging-market assets in Russian equities. "And those who think that by buying Russian oil stocks they're going to capture the oil windfall are kidding themselves."

The RTS rose 2.2 per cent yesterday as Medvedev, the chairman of Gazprom, took over the presidency, and added 0.9 per cent to 2,220.7 as of 12.34pm yesterday.

Gazprom, the biggest natural-gas producer, overtook General Electric as the world's fourth-largest company after Medvedev became president.

The RTS trades at a 17 per cent discount to the UK's FTSE 100 Index, which is valued at 11.5 times estimated profit. France's CAC 40 trades at 11.3 times and Germany's DAX at 11.8.

Rosneft, Russia's largest oil producer, has underperformed the MSCI Emerging Markets Energy Index by 41 percentage points since it went public in 2006. The Moscow-based company trades at 11.8 times profit, compared with a ratio of 13.3 for Beijing-based CNOOC, China's largest offshore oil producer.

Rosneft has been hurt by inflation because of rising equipment, infrastructure and wage costs, Peter O'Brien, chief financial officer, said in an interview last month in Moscow.