Putin’s Push Into Crimea Shows Cheap Can Get Cheaper in Russia

Photographer: Andrey Rudakov/Bloomberg

A stock price index graph shows plunging stock prices on an electronic information screen at the headquarters of the Micex-RTS Moscow Exchange, Russia's benchmark stock index, in Moscow on March 3, 2014. Close

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Photographer: Andrey Rudakov/Bloomberg

A stock price index graph shows plunging stock prices on an electronic information screen at the headquarters of the Micex-RTS Moscow Exchange, Russia's benchmark stock index, in Moscow on March 3, 2014.

Russian stock investors have become experts at bracing for the unexpected from President Vladimir Putin. After watching him seize companies, jail dissidents and support Syria, investors have put a discount on Russian stocks that makes them the cheapest in emerging markets.

They're poised to get even cheaper. The 11 percent rout in the benchmark Micex index yesterday shows Putin’s military incursion into neighboring Ukraine is further alienating foreign investors, according to Commonwealth Financial Network and Firebird Management LLC. U.S.-based exchange-traded funds investing in Russian equities have lost 20 percent of their total assets this year, the biggest drop among 46 country-specific ETFs tracked by Bloomberg.

Russia has made a deliberate decision that their geopolitical exposure in Ukraine is more important than their economic relations with the rest of the world,” Brad McMillan, chief investment officer for Waltham, Massachusetts-based Commonwealth Financial Network, which manages about $86 billion, said by phone yesterday. “I would certainly expect Russia’s market to suffer in the short term. So cheap could get cheaper.”

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The nation’s benchmark Micex Index gained 5.3 percent to 1,356.54 in Moscow today after sinking 11 percent yesterday. The measure has dropped 9.8 percent this year, sending valuations to 4.7 times estimated earnings. That’s about a third of the 13.4-multiple of India’s S&P BSE Sensex Index. (SENSEX) Brazil’s Ibovespa trades at 9.3 times and China’s Shanghai Composite Index (SHCOMP) is valued at 7.8 times. The Micex added 5.8 percent to 1,363.01 as of 3:13 p.m. today in Moscow.

‘So Cheap’

“We’ve looked at Russia for a while just because the equity market has looked so cheap,” Sameer Samana, the St. Louis-based international strategist at Wells Fargo Advisors LLC, said by phone. His firm oversees about $1.4 trillion. “But as often is the case, things tend to be cheap for a reason, and a lot of investors are realizing why Russia was looking as inexpensive as it was. A lot of times, valuation doesn’t discount the political risk until it surfaces.”

The Bloomberg Russia-US Equity Index of the most-traded Russian equities in the U.S. fell 7.7 percent to 81.59 yesterday, the lowest level since June 2012. RTS stock-index futures declined less than 0.1 percent to 114,180 in U.S. hours.

While Putin freed former Yukos Oil Co. owner Mikhail Khodorkovsky in December after 10 years in jail and invested $43 billion in the Sochi Olympic games to showcase the reforms taking place in Russia’s economy, his decision to mobilize the army into the Black Sea peninsula is undermining investor confidence.

ETF Plunges

The Market Vectors Russia ETF (RSX), the largest dedicated Russian exchange-traded fund tracking companies from Gazprom OAO (GAZP) to OAO Lukoil, sank 6.9 percent to $22.76 yesterday, the lowest since August 2009. It has slumped 21 percent this year. The RTS Volatility Index, which measures expected swings in the stock-index futures, decreased 21 percent to 58.47 today.

Investors are stepping up withdrawals from Russian equities, with outflows in the last 10 days amounting to 7.3 percent of total redemptions from U.S.-based ETFs investing in emerging-market funds, according to data compiled by Bloomberg. This compares with a level of 2.9 percent for the first two months of the year.

Leveraged investors in Russian stock-index futures are liquidating their positions after the Moscow Exchange raised initial margins for speculators to trade futures on 15 stocks including Gazprom and Lukoil. Outstanding contracts, known as open interest, for the month of March on the dollar-denominated RTS Index dropped to 1,012,568 yesterday, a decline of 13 percent from Feb. 28, according to data compiled by Bloomberg.

Georgia Conflict

Gazprom, which supplies about 30 percent of Europe’s gas needs and sends more than half of its exports via Ukraine, plunged 12 percent to $6.73 in New York, the biggest drop in five years.

Putin, who soon after coming to power in 1999 restored the music (though not the lyrics) of the Soviet-era national anthem and later described the collapse of the Soviet Union as the greatest geopolitical catastrophe of the 20th century, has boosted the state’s role in the economy.

Beginning in 2004, state-owned oil producer OAO Rosneft took over Yukos, Khodorkovsky’s main asset and Russia’s largest crude producer at the time. Last year, the company purchased TNK-BP, a BP Plc (BP/) oil joint venture in Russia, for $55 billion.

The Micex gauge lost a third of its value from August 2008 through September 2008 when Russia routed Georgia in a five-day war over the separatist region of South Ossetia, which has since declared its independence from Georgia. Moldova, on Ukraine’s southwest border, also has a pro-Russian secessionist region, Transnistria.

“This is no Georgia and the invasion in Ukraine will have a much, much bigger impact,” Ian Hague, founding partner of New York-based Firebird Management LLC, which manages $1.3 billion of assets including Russian stocks, said by phone from Moscow yesterday. “This time, the invasion is happening on the borders of five NATO members.”

United Co. Rusal, a Moscow-based aluminum producer, jumped 3.1 percent to HK$2.65 in Hong Kong trading. The MSCI Asia Pacific Index added 0.2 percent.

To contact the reporters on this story: Halia Pavliva in New York at hpavliva@bloomberg.net; Julia Leite in New York at jleite3@bloomberg.net

To contact the editor responsible for this story: Tal Barak Harif at tbarak@bloomberg.net

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