Russia Stocks Slide as Grid Spending Plans Trigger Debt Concern

Russian stocks declined as OAO Russian Grids, the nation’s largest electricity distribution company, and its unit Federal Grid Co. dropped on concern a plan to boost investments will curb free cash flows.

Federal Grid, Russia’s monopoly for high-voltage power transmission, declined 6.1 percent to 10.476 kopeks, the lowest since April 24. The power company is seeking to raise its investment program to 200 billion rubles ($6.2 billion) a year, Chief Executive Officer Oleg Budargin said yesterday. He also proposed increasing Russian Grids’ program to 250 billion rubles a year. The stock sank 4.5 percent to 1.085 rubles.

“The market is reacting negatively to Budargin’s comments,” Sergey Beiden, an analyst at Otkritie Financial Corp. in Moscow, said by phone. “We’re very likely to see much lower tariff growth. An increase in the investment program and a drop in tariffs will lead to the lack of balance in the investment plan,” and the companies would probably have to tap the bond markets, increasing their debt burdens, Beiden said.

The ruble-based Micex Index (INDEXCF) decreased 1 percent to 1,328.35 by 2:42 p.m. in Moscow. The dollar-denominated RTS Index (RTSI$) retreated 1.6 percent to 1,301.83, 20 percent lower than this year’s high. Utilities lost 2.2 percent on average, the biggest decline among sector group on the benchmark. The Russian May Services PMI index fell to 51.4 from 53 in April, missing estimates, data from HSBC Holdings Plc and Markit Economics show.

Federal Grid’s investment plans may lead to a 50 percent increase in debt between 2014 and 2016, cutting its free cash flow, VTB Capital said in an e-mailed note today.

Inflation Accelerates

Inflation accelerated for a second month in May to the fastest pace in 21 months, limiting the central bank’s scope to cut interest rates, the Federal Statistics Service in Moscow said yesterday.

Russia’s economy will probably expand 2.3 percent in the second quarter, according to the median estimate of 9 economists in a Bloomberg survey. That’s less than the 2.5 percent forecast a month earlier.

The nation’s economy grew at the weakest pace since 2009 in the first quarter as the euro area’s longest recession hurt the demand for commodity exports, federal data showed on May 17. Russia’s central bank kept its refinancing rate on hold for an eighth month in May.

OAO Mechel (MTLR), Russia’s biggest coking coal producer, fell for the sixth day, dropping 6.7 percent to 90.9 rubles, the lowest intraday level since January 2009.

Crude Rises

Crude oil increased 0.3 percent to $93.62 in New York as an industry report showed U.S. inventories dropped the most since December. Brent oil advanced 0.1 percent to $103.34 a barrel on the London-based ICE Futures Europe exchange. Urals crude, Russia’s major export blend, climbed 0.1 percent to $102.97.

The volume of shares traded on the Micex was 5.2 percent below the gauge’s 30-day average, while 10-day price swings plunged to 18.1, the weakest since May 21.

Russian equities have the cheapest valuations among 21 emerging markets tracked by Bloomberg. The Micex trades at 5 times its 12-month estimated earnings and has dropped 9.9 percent this year, compared with a multiple of 10.3 for the MSCI Emerging Markets Index, which has retreated 5.5 percent.

The Russian Volatility Index rose 4.8 percent to 28.45 today. The Bloomberg Russia-US Equity Index of the most-traded Russian companies in the U.S. fell 1 percent to 87.17 yesterday.

To contact the reporter on this story: Ksenia Galouchko in Moscow at kgalouchko1@bloomberg.net

To contact the editor responsible for this story: Wojciech Moskwa at wmoskwa@bloomberg.net

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