April 1 (Bloomberg) -- The rally in Russian stocks, Europe’s best-performing market this year, probably will stall as rising inflation and unemployment choke off the potential for economic revival, Morgan Stanley said.

The CHART OF THE DAY shows Russia’s Micex Index climbed 26 percent this year, trailing the Shanghai Stock Exchange Composite Index’s 32 percent gain. Unlike China, Russia’s so- called misery rate, the sum of inflation and unemployment, rose to a six-year high with surging consumer prices leaving little room for reductions in borrowing costs to stimulate growth.

Russia’s “real economy is going to get worse, and I don’t think you can make a case that Russia’s going to continue to rally” beyond the short term, Michael Wang, a Morgan Stanley emerging markets strategist in London, said in an interview. He has an “equal-weight” recommendation on Russian equities and an “overweight” on China. “Russia can’t lower interest rates to encourage growth as much as in Asian countries,” he said.

While the depreciating ruble forced Russia to raise the rate on loans issued through so-called repurchase auctions twice in February, China has cut interest rates five times since September. Inflation in Russia will average more than 11 percent this year as unemployment jumps above 12 percent and the economy shrinks 4.5 percent, its first contraction in a decade, the World Bank said March 30.

Russia’s misery rate is the fourth-highest among 60 economies tracked by Bloomberg. China, which is targeting no more than 4.6 percent unemployment this year and had falling consumer prices in the year to February, has the second-lowest misery rate after Thailand. An increasing misery rate in developing countries is “not a good sign,” said Templeton Asset Management Ltd.’s Mark Mobius in an interview on March 23.

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To contact the reporter on this story: William Mauldin in Moscow at wmauldin1@bloomberg.net

Last Updated: April 1, 2009 03:51 EDT