The Bulls Have Left Moscow

Under Vladimir Putin, it seemed, no Kremlin ploy could shake world confidence in Russian markets. The 2004 jailing of tycoon Mikhail Khodorkovsky on politically motivated charges sent the market into a swoon, but recovery was swift as oil prices rose. In 2005 Russia's top foreign-portfolio investor, Hermitage Capital's Bill Browder, had his visa revoked after criticizing the secretive books of Kremlin-controlled companies. The market barely flinched. Last year, after the Kremlin pressured Royal Dutch Shell into selling offshore-gas operations to state-owned Gazprom at a below-market price, the capital kept rolling in. But has the well of confidence finally run dry?

The flight of Robert Dudley may have drained the last drop. The CEO of a joint venture between BP and Russia's TNK oil company, Dudley left Moscow on July 24 after months of harassment aimed at pushing the British partners out. Federal agents raided TNK-BP headquarters, a "technicality" left most BP staffers without visas and finally prosecutors threatened Dudley with labor- and migration-law violations. Over the next week Russian stocks fell 12 percent; they're now down 2 percent for the year, while other oil-rich developing nations are still up: Brazil by 8 percent, the gulf states by an average of 28 percent. The drop comes despite the fact that President Dmitry Medvedev, who took over from Putin in May, is saying all the right things about fighting corruption and reassuring global markets. The recent roller-coaster ride has "finished the Russian equity market's reputation as a safe haven," says Roland Nash at Renaissance Capital in Moscow.

It could get worse. JPMorgan lowered its rating on Russian stocks from "neutral" to "below market," citing fears that the state will interfere in markets to stem inflation and warning that "economic momentum is slowing." Funds that have left Moscow include Hermitage: "We have reached a tipping point," says Browder. "Returns aren't big enough to justify the risks anymore."

Medvedev tried hard last week to talk up Moscow's stock market as "one of the most attractive in the world right now." He had a point. Medvedev has made many smart moves: preventing a banking-liquidity crisis in April, curbing the practice of selling commodities to offshore shell companies to avoid Russian taxes. Shares on the Moscow exchange now sell at an average price-to-earnings ratio of less than 10 (compared with 25 to 30 in India and China), making Russian stocks the cheapest in emerging markets. But low prices won't bring foreigners back if Moscow keeps running them out of town.

© 2008