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Sentence Sows Doubts as Futures Drop: Russia Overnight

Jailing Sows Legal Doubts as Futures Decline
A protester detained by police during a demonstration in central Moscow holds a portrait of opposition leader Alexey Navalny, who was sentenced to a five-year prison term in a Russian court, July 18, 2013. Photographer: Kirill Kudryavtsev/AFP via Getty Images

Futures on Russia’s RTS stock index declined as protests flared in Moscow against the prison sentence given to one of President Vladimir Putin’s most prominent opponents.

Contracts on the gauge due in September fell 0.2 percent in New York hours yesterday. American depositary receipts of OAO Gazprom, the nation’s biggest company, sank 1.8 percent and traded at the biggest discount to the Moscow shares in a week. The Bloomberg Russia-US Equity Index of the most active Russian stocks in New York fell 1.4 percent after a court announced a five-year sentence for Alexey Navalny, who led demonstrations against Putin over the past two years that were the biggest street protests since the president took office in 2000. Navalny was freed from custody today pending his appeal.

The verdict against Navalny for embezzlement sowed doubts about the rule of law in Russia as officials in Europe and the U.S., including President Barack Obama’s spokesman, Jay Carney, denounced the conviction as part of a “disturbing trend” in Russia. Several thousand protesters gathered for an unsanctioned rally in support of Navalny near the Kremlin. Police detained some demonstrators and blocked off streets amid shouts of “Freedom to political prisoners.”

“This ruling explains why Russia trades at a discount to emerging markets,” Ed Kuczma, an analyst at Van Eck Associates Corp., which manages $37 billion, including Russian equities, said by phone yesterday. “Government opponents thrown in jail is not a good sign in becoming a market-friendly economy.”

Russian stocks, already the cheapest among 21 emerging markets tracked by Bloomberg, widened their discount to peers after Navalny, 37, was led away in handcuffs from court in Kirov, 560 miles northeast of Moscow, yesterday. The gap had narrowed to the smallest in four months before the ruling.

Moscow Slump

“Navalny’s sentencing is bad for the market,” Ilya Kravets, the director of investment research at Daniloff Capital LLC in New York, said by phone yesterday. “It raises the question of the country’s political risks fueling its discount to emerging markets. The discount had been shrinking for the past three weeks and now the trend is reversed.”

Russia’s Micex index traded little changed at 1,415.51 by 11:27 a.m. today after tumbling 1.1 percent yesterday and trades at 5.4 times analysts’ earnings estimates for member companies, a 50 percent discount to the MSCI Emerging Markets Index of developing-nation stocks.

Russia is ranked the most corrupt nation among the Group of 20 advanced economies in Berlin-based Transparency International’s 2012 Corruption Perceptions Index.

Gazprom, the natural-gas export monopoly, fell to $7.98, declining by the most since June 20 on trading volume that was 60 percent higher than the daily average of the past 90 days. The ADRs settled at a 0.6 percent discount to the company’s Moscow-listed stock, the most since July 10.

Political Opponents

Navalny is the most prominent opponent to face prison since former Yukos Oil Co. owner Mikhail Khodorkovsky, 49, once Russia’s richest man, was detained in October 2003. He is now serving a 13-year sentence. At least two other high-profile critics -- economist Sergei Guriev and former chess grandmaster Garry Kasparov -- have left Russia this year.

Putin, who started his third term as Russia’s president in May 2012, pledged to sustain economic growth during his campaign, reverse “repressive” state policies and protect private business.

In November 2010, Navalny published on his website what he said was a report by the government budget watchdog showing that officials at state oil pipeline operator OAO Transneft embezzled $4 billion while building a link to the Pacific Ocean that opened a year late in December 2009. The allegation has been denied by the company and the Audit Chamber watchdog.

State Companies

Navalny “exposed irregularities at VTB and Transneft and other companies, so there are questions about whether state-owned companies will be as scrutinized and change their practices as previously hoped for,” Dmitri Kryukov, the chief investment officer at Verno Capital, said by phone from Moscow.

RTS index futures dropped to 136,750 in U.S. hours as the Bloomberg Russia-US gauge slipped to 92.02.

The Market Vectors Russia ETF, the largest exchange-traded fund dedicated to Russian equities, fell 2.1 percent from an eight-week high to $26.95. The RTS Volatility Index, which measures expected swings in the stock futures, decreased 0.5 percent to 24.40.

Russia’s ruble weakened 0.5 percent to 32.49 per dollar yesterday, snapping three days of gains. It decreased 0.2 percent to 36.9792 against the dollar-euro basket used by the central bank to manage swings that erode exporter competitiveness.

United Co. Rusal, the world’s largest aluminum producer, rose 0.4 percent to HK$2.90 in Hong Kong trading. The MSCI Asia Pacific Index fell 0.4 percent today.

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