A bumpy ride in the wild East

Is the crisis really over? Experience teaches Martin Taylor, of Baring Asset Management, that investors should be cautious

BORIS YELTSIN finally got some good news last week. After sliding another 10 per cent on Tuesday, the Moscow stock market rallied 12 per cent on Wednesday, suggesting Russia's latest economic crisis might have bottomed out. Interest rates were cut from 150 to 60 per cent, and Western investors paused for breath. It was another jolt on a roller-coaster ride stretching back to the war in Chechnya.

10 January 1996

Further fighting in Chechnya, and Yeltsin's poll rating is down to 8 per cent. This is bad news, given that his main rival in July's election, the communist Gennady Zhuganov, may try to stop the clock on reform. The market falls further. We retain our positions, given the extreme undervaluation of Russian assets, trading at 90 to 95 per cent discounts to international norms. We believe the risk of renationalisation is fully priced in.

18 March 1996

The Yeltsin campaign stirs. We go overweight as a Yeltsin victory will sharply reduce the risk premium associated with Russia, letting asset prices rise. With 150 million people and huge oil, gas and metals reserves, the country offers huge potential.

1 July 1996

Yeltsin wins with 54 per cent of the vote. Strong rumours emerge that he has had a heart attack. With the market up by a startling 165 per cent since 18 March, we decide to take some profit.

2 July 1996

So does everyone else. The market falls 24 per cent in three weeks. What would have happened if Yeltsin had lost?

5 November 1996

Yeltsin has open-heart surgery. The market trembles. My wife names our new kitten Boris, as it frequently visits the vet.

6 November 1996

The operation - Yeltsin's - is a success. This and the peace deal in Chechnya lead us to increase our weighting in the market.

30 April 1997

The market has risen a further 70 per cent on the appointment of a new reformist cabinet. Hedge funds and investors from Asiahave begun pouring money into Russian stocks even though valuations are no longer as enticing.

12 June 1997

I am unnerved to be told by my taxi driver on the way to Heathrow airport that he closely follows the Russian market.

14 June 1997

My taxi driver at Moscow's Sheremetyevo airport also enthuses about the stock market. We start taking profits.

22 October 1997

Regardless of valuations, which are hard to justify, Asian investors and a host of converts to Russia continue to buy. The market is up 57 per cent from June and an incredible 645 per cent from March 1996.

24 October 1997

An investor asks me why we have so little in Russia (36 per cent of our regional portfolio). I comfort myself that I don't manage Asian funds: Hong Kong is succumbing to the financial turmoil in other Asian states.

27 October 1997

US investors start to worry about Asia's impact on corporate profits. US and EU markets start to slide, reducing the appetite for risk and generating a desire to book profits. The Hong Kong peg comes under pressure, focusing hedge funds on other fixed exchange-rate regimes. Russia's de facto currency peg, risk profile and recent gains mean it scores on all three counts.

28 October 1997

US and EU investors take profits, but with no buyers by 11am the market is down 10 per cent. Taxi drivers and Asian investors panic. The market ends down 23 per cent.

29 October 1997

The Dow has rallied. Numerous brokers say the previous day's carnage is a "buying opportunity". We think the opposite - Russia's bubble has burst - and start selling into a 25 per cent bounce.

30 October 1997

The market starts to slide. We sell, moving underweight.

10 November 1997

Sustained pressure on the rouble, as a result of Russia's dependence on foreign funding for its budget deficit, means buying opportunities arrive on a daily basis. We continue to sell. The fall in commodity prices sparked by the Asian crisis is hurting Russia's trade balance, which will put further pressure on the rouble.

29 January 1998

A combination of the Russian Central Bank raising interest rates to 50 per cent, the promise of budget cuts and a recovery in Asia ends the carnage. The market is 54 per cent below its peak

30 January 1998

The market starts to rally in thin volume. We calculate the long-term damage high interest rates and low oil prices will do and stay underweight. Only by examining the facts can we ignore those whose livelihood depends on talking up the market.

8 May 1998

Indonesia implodes. Tokobank, Russia's 12th-largest, collapses. Initially the market ignores all this, focusing on the reformist composition of the new cabinet

15 May 1998

Russian banks respond to the tightening interbank market by raising liquidity by selling stocks and bonds. Riots in Indonesia deter foreigners from buying.

18 May 1998

Panic sets in. Russian banks try to sell at any price. The market falls 14 per cent: this time no one tells me that it's a buying opportunity.

27 May 1998

With the rouble wilting and the market down a further 12 per cent, interest rates are raised to 150 per cent. Few believe Russia's budget can afford this.

1 June 1998

The market falls another 12 per cent. An investor asks why we have so much in Russia (now 8 per cent of the portfolio). Given the relatively good performance of the rest of the region (Poland, Hungary and the Czech Republic) I can still comfort myself with the fact that I do not manage an Asian fund.

2 June 1998

With the index now down 46 per cent in four weeks and 68 per cent from the peak last October, rumours circulate of an IMF-led G7 support package for Russia. The market bounces 16 per cent.

3 June 1998

The bounce continues. We look at our projections and conclude that, with anguish in Asia likely to generate periodic external shocks and cap any recovery in resource prices, Russia is likely to remain vulnerable to speculative attacks. Substantial support from the IMF/G7 is vital, but will it come in time and be enough? High interest rates and low oil prices are likely to constrain GDP and earnings growth. We decide to remain underweight.