Russian equities have started 2012 as they left 2011. The direction and volatility in the Russian equity market continues to be dictated mainly by external events. The Eurozone crisis, although currently the critical global issue, is not the only factor that will determine how Russia and other emerging markets perform this year. In this note, we look at the 12 most important "known" factors expected to have an impact.

> Euro debt fears increasing. The optimism that helped all major equity markets start the year off strong is likely to be in short supply today. Investors are expected to throw the risk switch back to "off" for a few days until there is some clarity over how the Eurozone countries plan to proceed with the bailout plan after S&P cut the AAA ratings of France and Austria, two of the six original sponsoring countries. The fund now may not be able to raise enough money to contain the debt crisis. In addition, investors will want to hear how Greek debt restructuring talks may proceed to avoid a default after talks broke down on Friday. The US markets are closed for a holiday today, so that will give investors an unhindered view of the wreckage strewn across Europe. In particular, the equity markets will keenly watch how the bond market reacts to the sale of EUR 8.7 bln in French bonds scheduled for today.

Privatization plans are in the spotlight again, as Kommersant revealed in an article yesterday that Deputy Prime Minister Igor Sechin submitted a letter to the government to delay privatization plans. According to the newspaper, Prime Minister Vladimir Putin suggested that the Economics Ministry review Sechin's suggestions by February 15. The ministry will hold a meeting to discuss the proposals on Monday.

A rising oil price is not, in isolation, enough of a reason for Russian equities or the ruble to move against a negative trend in global emerging markets. But, as we saw in 1Q11, rising oil set against even a stable global backdrop can bring significant outperformance to Russian assets. So now, again, we have a rising oil price and, last week, that helped Russian equities and the ruble to outperform as there was a positive global trend.

> Moscow's bourses are easing foreign investor access. Russia is on vacation until January 10 - a week from today. Government offices, banks, industries, etc, will remain closed. But, for the first time, Moscow's bourses will be open for trading throughout this period. Activity will inevitably be low as most domestic investors will stay away and prices will move to reflect the trend in global markets and in the GDR/ADR markets (open for normal business). This year's holiday opening is part of the effort to raise Moscow's profile as an international bourse after the merger of MICEX and RTS in mid-December.

Investors remain wary of Emerging Market risk. Investors cut exposure to emerging market equity funds again last week, extending the run of redemptions to a sixth straight week. Even though economic indicators in the US and elsewhere have generally been positive in recent months, investors clearly fear that the euro zone debt crisis may escalate and affect all major global economies. But the net total taken out last week was only $308 mln and that was a big improvement on the $4.3 bln redeemed the previous week.

Yesterday's sharp fall in the Russian equity market was an over-reaction to reports of Moscow street protests. While events across North Africa and the Middle East earlier this year suggest it is foolish to dismiss such events as not having consequences, in Russia, those consequences are much more likely to play out over the term of the next parliament rather than dramatically at present.

> As investors face a new year, rarely has the outlook been so uncertain and the possible scenarios so extreme. Confidence is deteriorating in Europe's ability to avoid an even more serious debt crisis and economic recession in early 2012. Such events would almost certainly lead to contagion in the US banking system and a lowering of growth expectations in that country and in China. The hope for investors in Russian assets is that the crisis does come to a head in early 2012 and that a new base of valuation and risk reference can then be established. Until that happens, none of the traditional "reference points of relative valuation" can be trusted because current assumptions, e.g. earnings growth, will certainly change. To a large extent, 2012 is the undiscovered country.

As expected, the Russia-WTO working group yesterday cleared all remaining issues and set out the terms for Russia to join the trade body in mid-December. Assuming Russia's membership is approved at the WTO Council meeting (December 15-17), the Duma will have to ratify the entry terms early in 2012 and Russia would then officially become a member 30 days after it notifies the WTO that ratification is completed.

by Chris Weafer

Italian news will dominate. Asia’s markets are alternating between a small gain and small loss this morning as investors wait for what they see as a crucial vote in Italy’s parliament later today. A loss for the Prime Minister will widen the bond default gap and send all markets lower at least as an initial reaction. One bright spot for Russia is that oil is again higher, trading at $114.5 p/bbl at mid session, along with copper (+0.9%) and some other metals as China demand is holding steady. That should again help the oil majors and the ruble to add to yesterday’s gains, albeit modestly. Gold is also better, up 0.2%, an silver is 0.5% higher. But, net net, it will be a case of nervously watching, and reacting to, news from Italy today.