These events come after a generally good news week for the investment story in Russia, which, because of the dominance of external drivers and political risk dominating the headlines in international media, had less of a market impact than they deserved. Russia's WTO membership application was approved after almost 18 years of negotiations; Prime Minister Vladimir Putin made a few, but significant concessions during his televised Q&A session; and macro data confirmed a steadily improving growth trend in the economy and national balance sheet that is already one of the best in the world. The decision taken by OPEC ministers also creates a better basis for assuming an average oil price of $100-110/bbl for 2012, albeit we may still see weakness in 1Q12 before Middle East regional risks rise again in 2Q12.

As Western markets now head into the usually quiet Christmas and New Year holiday, there should soon be less external impact on the domestic market, and the domestic news headlines will be more of a dominant driver. But, before we get to that period, there is the potential for a few more external bumps as, for example, the war of words continues over the rating agencies' review of European Sovereign debt ratings and we get the usual year-end populist statements from political leaders across the region. Eurozone finance ministers will hold a conference call later today to try to advance the rescue talks.

CAPITAL MARKET REFORMS

The first step in an important series of market reforms starts today with migration of the RTS cash equity business to MICEX. Stocks will continue to be listed in both ruble and dollar format and all index series from both bourses will remain. This is the first step in making the local bourses more transparent and with better liquidity. The next step, on January 1, is even more important, as the law creating a domestic central depositary kicks in. It really makes a huge difference from July when foreign investors will be able to open an account directly at the central depositary.

Over the next six months, therefore, these changes could do the following. 
> Increase transparency and liquidity on the local bourse. 
> Open up the local bourse to a much bigger pool of global investors, such as Japanese trust banks, which are currently prohibited from dealing in local shares. 
> Eliminate the discount that local shares have relative to their GDR and ADR equivalents.

In the longer term, Russia still needs to address the most important issue of building a much bigger pool of domestic capital. Only then will the volatility/beta fall, the valuation discount with EM peers close and more issuers look to raise money at home rather than on international bourses.

NEW DUMA

The newly elected Duma will hold its inaugural session on Wednesday. United Russia now has a very slender majority, which will very likely make a difference to the government's economic policy and reform agenda over the next few years. The first thing that we should notice is that there now is a very vocal and invigorated opposition. The Duma is no longer the irrelevant rubber-stamp for government legislation that it has been.

The opposition may, for example, be opposed to any material cuts in social programs; may prove less cooperative with any government proposals to expand the privatization program; and may try to adopt more protectionist policies that may make the passage of WTO entry legislation a tougher project than previously expected. The first major legislation that the Duma debates in 2012 may well be the WTO entry bill.

In terms of stock market themes, a more influential Duma that requires some government policy compromise should be good for sectors such as the following.

> Pharma: pensions and health spending. 
> Real estate: addressing current overcrowded and bad city housing. 
> Banks: stable macro growth. 
> Consumer themes: stable macro growth. 
> Transport: stable macro growth and infrastructure improvement. 
> Agriculture: expected to be a major government and Duma reform theme. 
> Manufacturing: state support to help the manufacturing industries improve ahead of WTO entry competition, etc, and as the Duma adopts a more nationalist protectionist stance. 
Sectors that may be adversely affected include the following. 
> Utilities: less support for higher residential tariffs. 
> Extractive industries: may see additional extraction taxes and/or export tariffs.

NEXT MAJOR PROTEST

Although there was a small event last Saturday, the next major street protest is set for Saturday (December 24), and the authorities have already issued a permit for a gathering of 50,000. That is likely to be the last major gathering ahead of the New Year-January holidays, and the government is no doubt hoping that this break will diffuse the momentum. How well attended Saturday's event is, how it is conducted and whether any specific protest leaders emerge will determine whether that hope is realized or wishful. Currently incarcerated protest figures, such as anti-corruption blogger Alexei Navalny, are expected to address the crowd.

Putin did address the protest movement during his Q&A last week, and while some of his comments were either dismissive or again blamed foreign provocateurs, he did make several important comments that showed he is paying attention to the threat posed to his election campaign. Putting video cameras in all voting stations is probably a logistic impossibility, but the point made is that the government will be very keen to avoid any allegations of fraud at the March election in case it taints the next presidency.

Putin also referred to former Finance Minister Kudrin in very positive terms. Kudrin is regarded as a very able and pro-business administrator, so making it clear that he will have a very influential role in the next administration was a clear message to both the business and the investor communities. Putin's reference to Mikhail Khodorkovsky was also very tellingly different this time. He specifically said that a presidential pardon is possible, albeit if Khodorkovsky applies with an admission of guilt. That is a big improvement from the "the thief sits in jail" reference made last year. This is hopefully another sign that the next government will be much more proactive in pushing measures to improve the business and investment climate, as Khodorkovsky's controversial second jail sentence is continually highlighted as part of the negative perception of Russia risk.

Chris Weafer, Chief Strategist, Troika Dialogue