March 8 (Bloomberg) -- Short wagers on Russian stocks are soaring in the exchange-traded funds market after President Vladimir Putin’s incursion into Ukraine sparked the worst weekly selloff since May 2012.
Short bets on the Market Vectors Russia ETF rose 17 percent this week through March 6 to the highest in almost a year while total assets in U.S.-based exchange-traded funds investing in Russian equities increased 17 percent, according to data compiled by Bloomberg. The benchmark Micex Index dropped 7.3 percent in the week, the most since Putin cracked down on Moscow protests following his election in May 2012.
The surge in short bets shows investors are bracing for further declines as Putin defies the West’s calls to pull back from Crimea. Russian stocks are the cheapest in emerging markets as Putin’s seizure of companies, jailing of dissidents and support of Syria in recent years has eroded investor confidence in the world’s ninth-biggest economy.
“People buy Russian ETFs to create shares for shorting,” Dave Lutz, the head of ETF trading and strategy at Stifel Nicolaus & Co. in Baltimore said March 7. “The crisis is not over yet. We are waiting to see if President Putin will be satisfied with just Crimea or will he want to annex all of Ukraine. It is very possible that things will get worse before they get better.”
The Micex Index has dropped 11 percent this year, sending valuations to 4.8 times estimated earnings. That’s about a third of the 14-multiple of India’s S&P BSE Sensex Index. Brazil’s Ibovespa trades at 9 times and China’s Shanghai Composite Index is valued at 8 times.
A short sale is one in which stock is borrowed and sold, with the hope of profit by repurchasing the shares later at a lower price.
“There could be a disastrous outcome,” said Timothy Ghriskey, chief investment officer at Solaris Asset Management LLC in New York, which manages about $1.5 billion in assets. “It may get worse before it gets better.”
President Barack Obama said the U.S. and its allies will keep raising pressure on Russia to back down in Ukraine and held open the possibility of further sanctions if Putin’s government doesn’t respond.
OAO Gazprom, Russia’s biggest company, may cut gas supplies to Ukraine, after the country’s natural gas debt climbed to almost $2 billion, Chief Executive Officer Alexey Miller said in a March 7 statement. Gazprom halted gas flows to Ukraine in 2006 and 2009 amid disputes over prices and volumes, leading to shortages throughout Europe.
Bearish investors have piled into bets against the Market Vectors Russia ETF, pushing shares borrowed for short sales to 6.7 million on March 6, the most in almost a year and up from 3.3 million at the end of January, according to Markit, a London-based provider of financial information services
The Bloomberg Russia-US Equity Index of the most-traded Russian equities in the U.S. fell 6.5 percent to 82.62 this week. RTS stock-index futures declined 1.3 percent to 113,540 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.
Last year, as U.S. officials worked to convince the world that Bashar al-Assad’s regime used chemical weapons in Syria, Russia has made clear it would veto the United Nations resolution authorizing force against the regime. Secretary of State John Kerry warned Russia Feb. 17 to stop supplying weapons to Assad, saying the support was hampering peace talks aimed at ending three years of fighting.
The Market Vectors Russia ETF, the largest dedicated Russian exchange-traded fund tracking companies from Gazprom OAO to OAO Lukoil, sank 5.5 percent to $23.09 this week. It has slumped 17 percent this year.
“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 on March 3. 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.”
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