There is not much to report from Moscow at the moment, as the markets remain in a tug of war and are moving broadly flat, but with continued volatility. Volumes have come down and we are slowly falling into a holiday mode of trading, as investors are getting their holdings sorted before things shut down for the holidays. Thus far into December (at the time I write this), the market is down about 3%.

As mentioned, news flow has also settled down. The Uralkali investigation will not make a ruling before Dec 20, but the minister for natural resources did announce that he believes that the company is not at fault and should not be penalized. The timing of his statement, about a week after the company volunteered to shoulder most of the costs involved in the railroad re-routing (previously written about), should not be discounted and I believe it is yet another signal that we are already very close to the end game on this one and that once the railroad issue is resolved, things will go back to business as usual at the company and hopefully its share price will recover. Uralkali also greatly benefits from the ruble devaluation, as the vast majority of their revenues (90%2B%) come from exports and all their costs are in rubles, so if this investigation passes as expected, Uralkali is in a very good position to benefit more than others from the current environment.

Regarding the ruble, the CBR widened the band by another 1% this week, but with the USD weakening as well, the USD-RUR exchange rate stayed largely flat at around RUR 28/$1. We are still not seeing any significant run on the banks, though there has been a move into hard currencies by most citizens here over the last couple months. The government is still supporting a strong ruble policy and CBR reserves currently stand at just over $435 bil. (they fell $18 bil. this week). Oil prices are up about 10% w-o-w, which helps, but we still have a ways to go to where the current account and budget will balance, so we expect further ruble weakening, but in a controlled manner. Also, President Medvedev has indicated that Russia would start cooperating more closely with OPEC, but that seems more like an attempt to talk up the oil price, as with Russian production already flat to falling and most companies privatized, creating a mechanism for curbing output would be difficult. What is clear is that the government is devoting a lot of attention to helping industry deal with the crisis and they have also suggested that both electricity and gas tariff liberalization will be postponed or delayed. Although this will slow reform and hurt the electricity and gas industries, it should give a boost to the rest of industry.

Fund flows, which have been seeing huge outflows since August for GEM funds reversed last week and EM equity funds saw $1.3 bil of inflows over the week ending Dec 10th. This is the largest inflow since July and shows that some money is making its way back into these bombed out markets, but clearly sentiment still has a long way to go before inflows like this can be sustained over time.

As has been the case of late, investors continue looking to the U.S. for direction and with the auto bailout in question, everyone is nervous about what will hit next.

Jeffrey F. Combs, 52, MBA, a veteran of Wall Street (Morgan, Stanley; Lehman Brothers) has been living and investing in Russia since 1995. He is a frequent speaker at Investment Conferences, and considered to be an authority the Russian and CIS investment markets.

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