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From Florian Fenner, UFG Asset Management, Moscow:

While the sudden reversal in Russia’s economic fortune can be easily tied to the dramatic fall in commodity prices in the second half of last year (and the government’s slow response to it), we would highlight a number of additional factors that exacerbated the worsening conditions in the Russian equity and fixed income markets; corporate governance, leverage, and lack of market infrastructure.

Probably the biggest disappointment to us was the re-emergence of corporate governance issues – both on a state and corporate level – which we as investors had hoped were a thing of the past. Bluntly put, it seemed that equity investors were welcome as long as asset prices were on the rise, while during the fall they were regarded as a nuisance. TNK-BP, Mechel, Uralkali to name just a few.

This is even more striking when one compares to what lengths the Putin government is prepared to go to ensure that holders of international corporate debt are being paid on time and in full. The Russian government is clearly recognizing the value of credit and the access to it, whereas equity is seen more in terms of control than value.

The amount of leverage that had been taken out as collateral by the oligarchs and large businessmen against their shares bordered on the astonishing. While this phenomenon has been well publicized by the international media, it is often overlook......................

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