Ed Bentley

Elephants may never forget, but Russian bears appear happy to as investors shrugged off the Dubai crisis to lead the markets to a strong recovery.

Moscow's MICEX bounced back 5.8 per cent from its low of 1268.92 on November 26 as stocks around the world rallied as concerns eased over a potential default in the emirate.

"The Dubai story is looking more like a PR event than a real crisis; either it was badly handled last week or the current optimism is a well-executed cover-up," UralSib's chief strategist Chris Weafer wrote in a Dec. 2 note to investors.

Although exchanges in the United Arab Emirates were still suffering on Monday, the rest of the world appeared to be pinning its hopes on China, where manufacturing grew at its fastest pace in five years.

"Asian markets are strong this morning supported by yesterday's Chinese and US manufacturing data and increased risk appetite, as Dubai credit risk fell the most in nine months," Renaissance Capital analyst Tom Mundy wrote to investors.

A key test will come on Dec. 14 when a repayment is due for Dubai World, the company drowning at the bottom of its $59 billion debt reservoir.

"Dubai is a funny thing because the world has forgotten about it and there is one week left to default and there has been no serious restructuring proposal," said Scott Semet, head of strategy at IFD Kapital. "It seems like everyone is closing their eyes and crossing their fingers."

A further $20.6 billion of this debt is reported to mature in the next 24 months, and although Gulf based banks are most at risk, a default is likely to reverberate around the world.

Even if Dubai World manages to agree on a standstill, recent events should highlight the dangers of highly leveraged companies to investors, Semet said.

"In emerging markets and high yield issues in Europe or the US, it should have reminded investors that there is a high default risk," he said in a telephone interview. "But, after a day or two they forgot again - which is amazing."

Russian stocks continue to enjoy support from the high oil price, with Brent crude trading at over $75 a barrel, while the country's huge reserves and low debt to GDP ratio provide a shield against default.

However, the predicted 6.8 per cent for 2010 could put Russia under pressure, particularly if the oil price takes a hit.

"In the medium term it depends what happens to corporate debt because if the government starts guaranteeing a lot of it, effectively you get a large government debt," said Semet.