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As noted above in comments to Table 1, a longer fall of the RTS index in 1997-98 vis-vis its fall in 2008 should be ascribed to the fact that the downfall in oil prices over the former crisis was lasting for 24 months, while during the latter one just 5 months (see Fig. 6). At the same time, it took oil prices 11 months to bounce back after 1998, while after the collapse in 2008, as of January 2011, it has been already for 25 months that they failed to hit their past peaks, with their highest values accounting for 72.2% of the peak value registered in June 2008. As the future developments showed, in the aftermath of the crisis of the 1990s, oil prices had a practically 20-fold upside potential. By contrast, regardless of a far faster pace of the stock markets recovery, presently the growth potential of oil prices has been practically exhausted. Furthermore, given scenario-based conditions and main parameters of the longterm forecast of Russias socio-economic development for the period through 2030 (hereinafter referred to as scenario-based conditions-2030) designed by the RF Ministry of Economic development, oil prices may repeat their absolute peak of June 2008 only as early as by 20301. Meanwhile, it should be understood that projecting oil prices poses a special, extremely challenging problem, which no one has so far managed to satisfactorily crack.

Russia 1997-1998 Russia 2008-100,71,41,31,1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 months Source: by data of IFS IMF.

Fig. 6. Downfall and Recovery of Brent Prices during Financial Crises in Russia (Peak of the Price = 100%) Kuvshinova O., Tovkaylo M. Rasti ili kopit. Vedomosti 10 February 2010. On Vedomostis homepage, the article was complemented with the text of the Executive Summary to the Scenario-based conditions by the RF Ministry of Economic Development.

Section 3.

Financial Markets and Financial Institutes That the dynamics of oil prices and stock indices are intertwined is evidenced by data of Fig. 7, which presents results of changes of the correlation ratio between monthly relative changes in the RTS index and Brent prices over a 12 month-long period. The distinguishing feature of the moving correlation curve is that it mirrors a strengthening or weakening of the correlation between the indices in question with the 12-month lag.

The correlation between relative changes in oil prices and the RTS index appears clearly cyclic. While the index is climbing up to its pre-crisis peak or right in between its passing that peak and prior to the rise of the acute phase of the crisis the correlation ratio plunges momentarily and become negative. In other words, the oil price and the value of the index suddenly begin to change in different directions. During the collapse of the stock market, the positive correlation between changes of the index and oil prices begins to revive. Once the economy hits the bottom, the correlation is on the rebound to minus 1.

April 3000 1,RTS index 0,July 2005 (09.1995=100% )- left axis 0,2000 0,0,Brent price (09.1995=100% 0,)- left axis 1000 -0,March -0,Annual -0,correlation (right axis) 0 -0,Source: calculated by data of IFS IMF and the RTS Exchnage Fig. 7. Correlation between Changes in the RTS Index and Prices of Brent between September 1995 and February During the 1997-98 crisis, the RTS index hit its peak value in July 1997. Prior to that, the correlation ratio had been in the negative zone between -0.21 and 0.36. Between August and September 1997, the ratio plunged further to -0.55 to -0.67. Subsequently, it was being in the region of zero for another several months. Between January and July 1998, during the acute phase of the crisis, the correlation ratio hit the level between 0.46 and 0.68, ie. oil prices and stock prices were synchronized divers. In September 1998, the RTS index hit its bottom at the level of 438 points. Between August 1998 and late 1999 the correlation was close to zero, which exposes the absence of simultaneity in the indices dynamics.

After the crisis of the late 1990s, the Russian stock market had been rising practically uninterruptedly between late 2001 and May 2008. The most notable milestone in the dynamic of the correlation, however, was July 2005, when the trend of the index underwent a drastic change. Between August 2004 and July 2005 the correlation ratio had been within the range Jun-Jun-Jun-Jun-Jun-Jun-Jun-Jun-Jun-Jun-Jun-Jun-Jun-Jun-Jun-Sep-Sep-Sep-Sep-Sep-Sep-Sep-Sep-Sep-Sep-Sep-Sep-Sep-Sep-Sep-Sep-Dec-Dec-Dec-Dec-Dec-Dec-Dec-Dec-Dec-Dec-Dec-Dec-Dec-Dec-Dec-Dec-Mar-Mar-Mar-Mar-Mar-Mar-Mar-Mar-Mar-Mar-Mar-Mar-Mar-Mar-Mar-RUSSIAN ECONOMY IN trends and outlooks of 0.22 to 0.49. Between August 2005 and March 2008 the correlation ratio was steadily in decline and reached -0.53 in October 2007. That is to say, since August 205 and through the moment the stock market went downhill since the second half 2008 the stock prices and oil prices had taken different courses. Since April 2008, the correlation ratio had been positively high for nearly 2 years and hit its peak of 0.82 in April 2009. Since May 2009, the correlation began languishing and plunged to the levels between 0.08 and 0.15.

We believe the cyclicality of the correlation between relative changes in oil prices and quotations of Russian corporations shares should be ascribed to a substantial influence of inand outflows of foreign portfolio investors capital. The most accurate indicator of the flows are data of EPMR which reveal weekly and monthly in- and outflows of foreign investment funds investments in Russian issuers stock1. Fig. 8 presents data on rises in oil prices and stock prices in conjunction with totals of foreign funds capital invested in/withdrawn from Russia.

Increase in the RTS index (left axis) Increase in Brent prices (lef axis) Inflow/outflow of capital in/from funds, Investing in Russia (right axis) 2000 April 1800 1600 1400 March 1200 July 1000 800 600 400 -April -0 -Source: calculated on IFS IMF, RTS data and EMPR resource.

Fig. 8. Increase in the RTS Index, Oil Prices, Inflow (Outflow) of Resources in Funds Investing in Russia The data on capital flow allows understanding of why there is no correlation between oil prices and stock prices in the periods between July 2005 and March 2008, and April 2009 and late 2010.

In this particular case, indicators of capital in-and outflow regularly published by CBR bear less informational value as far as the stock market is concerned, for it is capital invested on the market for Rb.-denominated fixed income instruments. Perhaps, the financial market regulator and monetary authorities should be in need for establishment of a national system of monitoring in-and outflow of portfolio investors capital on the stock and bonds market, for the EMPR resource is commercial and its data are not available for most Russian investors and government representatives.

USD mln % a month Jul-Jul-Jul-Jul-Jul-Jul-Jul-Jul-Jul-Jul-Jan-Jan-Jan-Jan-Jan-Jan-Jan-Jan-Jan-Jan-Jan-Sep-Sep-Sep-Sep-Sep-Sep-Sep-Sep-Sep-Sep-Mar-Mar-Mar-Mar-Mar-Mar-Mar-Mar-Mar-Mar-Nov-Nov-Nov-Nov-Nov-Nov-Nov-Nov-Nov-Nov-Nov-May-May-May-May-May-May-May-May-May-May-Section 3.

Financial Markets and Financial Institutes Between July 2005 and April 2006 investment funds investing in Russia dramatically boosted volumes of attraction of capital: in span of just 10 months, the funds attracted new capital worth a total of USD 4.8 bln. Meanwhile, oil prices changed from USD 66.68/b to just 69.0/b. The spike in short-term investment capital in Russia at the time is explained by granting the country with investment ratings. Specifically, FITCH did so on 17 November 2004, followed by S&Ps move on 31 January 2005. Plus, on 31 May 2005 the court rendered the first verdict on the Khodorkovsky case, and numerous portfolio investors were in the mood for buying Russian authorities assurances of the uniqueness of the case in question.

The euphoria had been lasting until April 2006, with the RTC index adding 15.5% just in one month. Since May 2006 the capital inflow in investment funds investing in Russia was replaced by its outflow. Capital flight from Russia between May 2006 and March 2008 accounted for USD 4.6 bln. Meanwhile, oil prices rose from USD 73.28/b to USD 112.71/b. In all likelihood, the capital flight was fueled by analysts increasing concerns about risks associated with the overheating of emerging markets due to the looming signs of a crisis on the market for sub-prime mortgage securities. In August 2006, the US reported the first substantial decline in real estate prices; meanwhile, at the IMF conference in September 2006, N.

Rubini publicly announced a looming financial crisis in the US.

The outflow of portfolio investments from Russia kicked off in May 2006, followed by a brief intermezzo in mid-2008, with the investment funds seeing a capital inflow in April, May and June - most likely, under the impact of the pre-crisis oil price boom. Between July and March 2009 investors withdrew as much as USD 6.bln. from the investment funds investing in Russia. The average oil price tumbled from USD 123.45/b to USD 65.8/b over that period. As a result, the correlation between the index and oil prices soared to 0.83 in March 2009. Since that time the oil prices were on the upswing, and the next month saw the renewed capital inflow in the funds investing in Russia. Because of those reasons, the RTS index was reviving pretty fast and the level of the correlation between changes in oil prices and changes in stock prices remained high.

In span of 24 months between April 2009 and February 2011, it was just one month when foreign equity funds reported capital withdrawals. Overall, in the period in question, the funds collected USD 9.1 bln. from investors. While the average oil prices surged from USD 65.8/b in April 2009 up to USD 112.1 in February 2011, the growth in question was unstable on a month-on-month basis. By contrast, the rise in investments in the funds investing in Russia was steady. As a result, in the second half 2010, the correlation between oil prices and stock prices plummeted once again.

Differences in the intensity of depreciation of Rb. during the two crises concerned determined different dynamics of the RTS and MICEX indices revival. The assessment of shares in the portfolio of the MICEX index is made in Rb. equivalent, while that of the RTS index in USD equivalent. That is why after the 5-fold more depreciation1 of the Russian currency in 1998 the pace of the subsequent recovery of the MICEX index was greater than the one of the RTS index (Fig. 9). The MICEX index had bounced back to its pre-crisis peak already by May 1999, ie. just in 8 months after the economy passed the bottom of the crisis. By contrast, it took the RTS index 59 months to fully recover after passing its bottom value during the crisis.

Over the period between 1998 and 2003.

RUSSIAN ECONOMY IN trends and outlooks 8,Russia (RTS)-1997 Russia (MICEX)-1997 USD/Rb. exchange rate as of end-month Source: by data of JSC RTS, MICEX and Bank of Russia.

Fig. 9. Changes in the USD Exchange Rate, the RTS Index and the MICEX Index during the 1997-98 Crisis (July 1997 = 100%) During the 2008-09 crisis, the maximal level of Rb. depreciation accounted for 50% (Fig.

10), followed by the appreciation of the Russian currency. That is why the RTS and MICEX indices were recuperating practically at the same speed, with the latter index slightly outpacing the former one. In January 2011, the RTS index hit 76.0% of its peak value of May 2008, while the MICEX one - 89.5%.

150,125,127,89,71,76,58,40 31,21,Russia (RTS)-2008 Russia (MICEX)-2008 USD/Rb. exchange rate as of end-month Source: by data of JSC RTS, MICEX and Bank of Russia.

Fig. 10. Changes in the USD Exchange Rate, the RTS Index and the MICEX Index during the Crisis between May 2008 and January 2011 (May 2008 = 100%) fall, % July-July-July-July-July-July-July-May-May-May-May-May-May-March-March-March-March-March-March-January-January-January-January-January-January-September-November-September-November-September-November-September-November-September-November-September-November-Dynamics Jul-Jul-Jul-Jun-Jan-Jun-Jan-Jun-Jan-Sep-Oct-Feb-Sep-Oct-Feb-Sep-Oct-Apr-Apr-Aug-Nov-Dec-Mar-Aug-Nov-Dec-Mar-Aug-Nov-Dec-May-May-May-Section 3.

Financial Markets and Financial Institutes Domestic developments in Russia, as a rule, have recently had a loose effect on price changes for Russian corporations stock. The simplest explanation behind the phenomenon lies in a drastic increase in volumes of short-term foreign investment in the domestic equity market, as demonstrated by Fig. 8. In this sense, it is interesting to examine the VEBs record of implementation of anti-crisis measures on support of the domestic stock market in 2008-09, which are often subject to a biting criticism. For example, Mr. Vladislav Reznik, Chairman of the State Duma Committee for financial markets believes, this measure clearly was irrelevant and excessive, it distorted the real market picture1. Such assessments are partly determined by the fact that both VEB and the RF Ministry of Finance have failed so far to provide any publicly available account of how the funds were used and what was their effect on the market.

2005 2006 2007 2008 2009 2010 Public structures, excl. CBR Other participants in trading Bank of Russia Source: by data of MICEX.

Fig. 11. Proportion of Private and Public Brokers in the Volume of Stock Trading at MICEX, as % It is on record that in October 2008 VEB was given Rb. 175 bln. in a subordinated loan under 7% annualized. The loan was extended for the sake of supporting the equity market.

The bank repaid the loan, along with the interest, on 15 December 2009. The amount in question is roughly equivalent of USD 6 bln. According to the EMPR, it was the same amount foreign investment funds withdrew from Russian issuers stock between July 2008 and March 2009, with some 3.8 bln. out of the said amount being withdrawn between July and September 2008, ie. prior to the start of VEBs interventions on the financial market. Before the start of the VEBs interventions, the capital outflow from foreign funds investing in Russia had been fading notably. In April 2010, foreign funds already began attracting new capital onto the market.

Rushailo P. Razgovor nedeli. Vladislav Reznik: v kakoy-to moment pridyetsya uvelichit pensionny vozrast.

Kommersant Dengi, 7, 21.02-27.02. 2011, p. 30.







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