Time for Bull Market - The Awakening of the Russian Bear?

A political turning point for Russia may be near, according this great article from Moscow by my TradingFloor.com colleague Steen Jakobsen.

And if it is, what are the risk-reward scenarios for equities in the Russian market?

Valuations are low
Even though the as the commodity-dominated Moscow stock exchange has rallied by 10 percentage points in the past month, equity valuations are still below other emerging markets. Is it time for the Russian bear to wake up and spark a bull market?

The Russian equity market has been one of the most volatile in the last decade, much due to the fact that economic growth and earnings are driven by oil price development, chart 1.

With oil prices at current levels the Russian economy is in a strong growth pattern, which increases the purchasing power of the growing middle class. This should set the stage for a new “revolution” in the valuation perception of Russian assets, however the evidence of this in the market is yet to be seen, chart 2. Even when compared to other less liquid emerging markets, Russia is underperforming, chart 3.Fantastic natural resources, educational tradition
Russia is in a sweet spot to leverage on the emerging markets’ growth story for decades to come. In addition to the oil and natural gas resources, Russia’s main commodities, there are great amounts of other minerals, forest (timber), farm land, and water. Bottom line, Russia can leverage global economic growth and increasing global population.

But political risk is always a question in Russia.  It could be that a new liberalization has already started: Vladimir Putin made a rare official comment beginning of these week, "Russia needs more technology and less corruption."

And in an ideal world, Russia could use its vast commodity resources to create new technology clusters and knowledge-intensive industrial capacity.  While a true free entrepreneurial spirit will take time to mature, the educational tradition in Russia is stronger than most emerging market peers, especially within space technology, aviation and defence industry.

Russia’s entry into the WTO during 2012 will have a huge effect in increasing the competitiveness of the economy, as entry on the Russian market will be easier. Furthermore, it will increase the cost of not moving towards Western-style democrazy.

The names to get to know
Although the growth is expected to diverge significantly in the large Russian companies over the next year, table 1, they still represent post great financial stability and enjoy rather conservative valuation, table 2.
Political risks -What can change the bullish scenario
We have in recent time seen evidence of that Russia is far from a mature democracy, i.e. the aftermath of the parliament election. The political heritage is still strongly focused on centralized control. This has materialized in unsecure ownership rights and a less business-friendly climate. Although this will not change overnight, you might want to consider the fact that on the eve of the break-up of the Soviet Union, no single person in Russia had actually experienced non-communist system.

It could be regarded as a disadvantage that Russian leaders still have too great global political ambitions, which can come at a great cost, both money and economic growth due to a higher degree of isolation.

Another concern that are worth highlighting is the ever shrinking population of the country. In 1992, the Russian population stood at approx. 148.5 million compared to 143 million in 2010. The trend is expected to continue in the next couple of years although at a slower pace.

Regardless it should be worthwhile to monitor the awakening of the Russian bear.