ETF Puts at 20-Month High on China Output Woes: Russia Overnight

Options traders are buying the most protection in 20 months against a decline in Russian equities on concern oil will fall and weakening output in China will curb demand for metals.

The ratio of outstanding puts to sell the Market Vectors Russia exchange-traded fund, a U.S.-listed ETF that holds Russian shares, versus calls to buy rose to 2.07-to-1 yesterday, the highest since July 2010, data compiled by Bloomberg show. Futures expiring in June on Moscow’s dollar-denominated RTS index added 0.4 percent to 160,595 in U.S. trading, as the nation’s largest coking coal producer, OAO Mechel (MTL), slid the most in two weeks after breaching mine license rules.

The Market Vectors ETF, which includes shares of gas exporter OAO Gazprom and biggest lender OAO Sberbank (SBRCY), sank to a four-week low as copper and nickel dropped and crude, Russia’s biggest export earner, slid to the lowest in a week. A preliminary purchasing managers’ index signaled manufacturing in China, the world’s biggest consumer of industrial metals, contracted to the lowest since November this month, while European output shrunk more than economists estimated.

“The fear of what could happen to the commodity prices if China really began to slow down, which would clearly be a downside risk to the Russian markets, is why people are buying puts,” Roland Nash, chief investment strategist at Verno Capital in Moscow, which manages $200 million in assets, said by phone yesterday. We could see a “10 to 15 percent retreat in the RTS over the next four weeks, assuming we get more news about the global slowdown.”

Rusal Declines

The MSCI Asia Pacific Index (MXAP) sank 0.6 percent by 8:53 a.m. in New York as data indicating a contraction in European manufacturing fueled concern global growth is slowing. The Hong Kong-listed shares of Moscow-based United Co. Rusal (486), the world’s largest aluminum producer, were unchanged at HK$5.82 today.

The 30-stock Micex Index (INDEXCF) fell for a sixth day in Moscow, capping the worst losing streak in seven months. The index lost 1.4 percent to 1,529.51 yesterday, the lowest level since Feb. 10. The Market Vectors Russia ETF dropped 2.3 percent to $30.82.

China’s economy grew 8.9 percent in the last three months of 2011, the slowest pace for 10 quarters, as Europe’s debt crisis and a lackluster U.S. recovery limited demand for goods from the world’s largest exporter. Premier Wen Jiabao cut the nation’s growth target for 2012 to 7.5 percent on March 5, from 8 percent over the past seven years.

The preliminary 48.1 reading in a purchasing managers’ index from HSBC Holdings Plc and Markit Economics released yesterday was the lowest since November with results below 50 indicating contraction. The world’s second-largest economy, China is the biggest consumer of oil after the U.S.

Oil Drops

“If we see that China is slowing down further, the global economy is slowing down, oil prices will react and go down,” Peter Szopo, head of research at Alfa Bank in Moscow, said by phone yesterday.

OAO Lukoil’s ADRs fell 1.8 percent to $61.87 in New York yesterday, trading at a 15 cent premium to its Moscow-listed shares. Russia’s largest non-state oil producer fell 1.4 percent to 1,817.10 rubles, or $61.72, on the Micex. One depositary receipt is equal to one ordinary share of Lukoil.

Crude oil for May delivery fell 1.8 percent to $105.35 a barrel on the New York Mercantile Exchange yesterday. Brent oil for May settlement declined 0.9 percent to $123.14 on the London-based ICE Futures Europe exchange, while Urals crude, Russia’s chief export blend, retreated 0.6 percent to $119.77, the lowest level since Feb. 16.

The Standard & Poor’s GSCI index of 24 raw materials lost 1.1 percent to 695.57, the lowest level since March 6.

License Violations

ADRs of Mechel fell 5.8 percent to $9.83 yesterday, the biggest drop since March 6. Volumes totaled 11.74 million, four times the three-month average, according to data compiled by Bloomberg. On the Micex, Mechel (MTLR) stock declined 4.9 percent to 287.70 rubles, or $9.77. Each ADR represents one ordinary share of Mechel.

Russia’s environmental regulator found license violations by a Mechel unit, according to two people with knowledge of the investigation. The violations found by the Natural Resources Inspectorate, part of the Natural Resources Ministry, were at the South Kuzbass unit, said the people who declined to be identified because the matter hasn’t been made public.

The Moscow-based mining company broke a license agreement at parts of six deposits that are part of its Yakutugol unit, including the Elga coal field, Russia’s largest, the ministry said yesterday in a statement on its website.

Government Stakes

Mechel doesn’t see where it could have significant violations and will be able to resolve any problems when it gets the report, said spokeswoman Ekaterina Videman. The ministry and Mechel both declined to comment on South Kuzbass.

Russian President Dmitry Medvedev ordered the government and the central bank yesterday to prepare proposals on lowering the state’s share in banks to less than 50 percent, the Kremlin said.

Medvedev instructed Prime Minister and President-elect Vladimir Putin and Bank Rossii Chairman Sergey Ignatiev to submit the proposals by Sept. 1, according to a statement published on the Kremlin’s website. Sberbank (SBER) and VTB Group, the two biggest lenders, are controlled by the government.

“It’s good long-term for sure, but near-term it would put pressure on the Sberbank share price because it creates an overhang situation,” Jose Morales, who oversees $2 billion in emerging-market equities, including Sberbank shares, at Mirae Asset Global Investment in New York, said by phone yesterday.

1 Trillion Rubles

Sberbank ADRs fell 3.9 percent to $13.02, the lowest level since Feb. 23. The shares lost 2.3 percent to 96.01 rubles in Moscow, the equivalent of $3.26. One ADR is equal to four ordinary shares.

The authorities plan to raise more than 1 trillion rubles ($34 billion) from state asset sales from 2012 to 2014, the Economy Ministry said in September. Lenders run or part-owned by the state control more than half of the financial industry’s assets, the Deposit Insurance Agency estimated last year.

“We welcome the Russian president’s decision on reducing the state’s share in banks,” Sberbank Chief Executive Officer German Gref said yesterday in an e-mailed statement. “Since that will require changes to the law, realizing this task is possible on a horizon of two to four years. It’s very important that existing investors not suffer.”

The Bloomberg Russia-US Equity Index (RUS14BN) of Russian companies listed in New York declined 1.9 percent to 106.42 yesterday, the lowest level since Feb. 10. The RTS Volatility Index (RTSVX), which measures expected swings in the index futures, slipped 0.5 percent to 33.19.

CTC Media Inc. (CTCM), the Nasdaq-listed Russian television company, rose 1.5 percent to $11.69 in New York yesterday. CTC Media’s average daily share of viewers four years old and over rose to 7.5 percent in the week to March 18, after dropping the previous week, data compiled by TNS-Global showed yesterday.

Russian food retailer OAO Magnit (MGNT) is scheduled to report 2011 financial results in Moscow today.

To contact the reporters on this story: Ksenia Galouchko in New York at kgalouchko1@bloomberg.net; Halia Pavliva in New York at hpavliva@bloomberg.net

To contact the editor responsible for this story: Emma O’Brien at eobrien6@bloomberg.net

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