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Russia worried market growth could be bubble

"When a market is rising because the supply of funds is greater than the supply of assets, it is difficult to say when the ride will end."

Roland Nash, head of research at the Renaissance Capital investment bank

A record-shattering expansion of the Russian stock market over more than a year may have reached a ceiling and is beginning to worry the Russian government, which said on Thursday that it feared the creation of a financial bubble.

"We are very afraid that a so-called bubble is being created," Economy Minister German Gref was quoted by Interfax news agency as saying at a Cabinet meeting.

The stock market rose by 83 percent last year and has gained 30.5 percent in the first two months of this year -- a record rise compared to other world markets over the same period -- thanks to the influx of foreign pension funds and Russian oil revenues.

"The situation needs to be analyzed in the dozen or so companies that account for 80 percent of market capitalization in order to be ready for any change in the situation," Gref said.

The growing capitalization of energy companies in particular was a source for concern, said Gref, adding that "we need to keep our finger on the pulse of key companies to be sure that investor optimism does not lead to a collapse."

The head of Russia's federal service for financial markets, Oleg Vyugin, earlier this month said the increased capitalization of the Russian stock market, which now amounts to more than US$600 billion, or 80 percent of GDP, was "not without danger."

Roland Nash, head of research at the Renaissance Capital investment bank, compared the US$150 billion rise in capitalization of the Russian stock market since the end of last year to value created between 2001 and 2003, when Mikhail Khodorkovsky was arrested.

The arrest and the unprecedented judicial campaign against Khodorkovsky, then head of the Yukos oil major and Russia's richest man, was seen by critics as inspired by the Kremlin and led to sharp drops in a volatile stock market.

But the memory of this painful episode appears to have been completely erased and the Russian stock market could rise still further, Nash wrote in an analysis paper.

"When a market is rising because the supply of funds is greater than the supply of assets, it is difficult to say when the ride will end," he wrote, pointing to "a level of enthusiasm that is not justified by fundamentals."

The RTS, the benchmark index for the Russian stock market, fell 4.2 percent on Tuesday -- its biggest drop since October last year, a development that could signal the beginning of a market correction, analysts said.

But analysts also said that a wave of market flotations by Russian companies expected this year in which that of Russia's Rosneft oil group is one of the most keenly awaited, may fuel further demand for Russian shares among investors.

To make the Russian stock market less risky, the government is planning a reform of the system to favor the emergence of institutional investors in Russia and reinforce the protection of investors' rights.

Meanwhile, the London Stock Exchange, where trading in Russian shares reached US$4.3 billion last year, signed an agreement this week with the Moscow MICEX exchange to help the flotation of Russian companies on both markets.
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