March 19 (Bloomberg) -- The ruble strengthened for a third day as Russia pushed on with its annexation of Crimea and investors wagered the impact of Western sanctions will be mild. Stocks slumped after two days of gains.
The currency climbed 0.8 percent to 42.2596 against Bank Rossii’s target basket of dollars and euros by 6 p.m. in Moscow, when the central bank stops its market operations, extending its three-day increase to 1.9 percent. The Micex Index, which slid into a bear market last week, dropped 1.3 percent to 1,319.02 by the close, snapping the biggest two-day advance since May 2010.
U.S. and European Union sanctions against Russia have so far been limited to visa restrictions and asset freezes against several officials. Markets rallied as President Vladimir Putin told lawmakers yesterday there were no plans to further divide Ukraine, before signing an accord to admit Ukraine’s breakaway Crimean peninsula to the Russian Federation. Russian companies, including large exporters of commodities, will pay value-added tax tomorrow and mineral-extraction taxes on March 25.
“The relief rally continues, supported by the tax period,” Dmitry Dorofeev, a money manager at BCS Financial Group in Moscow, said in e-mailed comments. “The question is how long it will last.”
The ruble rally may come under pressure if the Finance Ministry returns with purchases of foreign currency for the Reserve Fund as the ruble strengthens beyond 36 per dollar, Maxim Korovin and Anton Nikitin, analysts at ZAO VTB Capital in Moscow, said in an e-mailed note.
The Finance Ministry suspended its purchases on March 4 after spending only 38 billion rubles out of 212 billion rubles planned, saying it didn’t see economic sense in buying above the level of 36 rubles per dollar.
Russian equities have the cheapest valuations among 21 developing countries monitored by Bloomberg, with shares on the Micex trading at 4.8 times projected 12-month earnings, compared with a multiple of 9.4 for the MSCI Emerging Markets Index.
“The main question now is whether the West will impose additional sanctions,” Andrey Verkholantsev, head of research at Kapital Asset Management LLC in Moscow, said by phone. “So far, the sanctions that we have seen have been rather mild.”
OAO Sberbank, the nation’s biggest lender, retreated 1.7 percent to 80.64 rubles. OAO Gazprom, the nation’s biggest company and natural gas producer, tumbled 1.1 percent to 125.55 rubles.
“The stocks are losing steam after yesterday’s growth,” Sergey Vakhrameev, an analyst in Moscow at AnkorInvest LLC, said by phone today.
Bank of America Corp. recommended being cautious on Russian stocks and waiting for the West’s decision on potential additional sanctions, according to an e-mailed note today. The analysts cited Sberbank, OAO Lukoil, OAO MegaFon, AFK Sistema and OAO Surgutneftegas as stocks sensitive to potential sanctions, a weaker ruble and the nation’s economic growth.
The Finance Ministry yesterday scrapped a bond sale planned for today, citing “unfavorable market conditions.” Government bonds due in February 2027 declined, with the yield rising one basis points, or 0.01 percentage point, to 9.23 percent.
The standoff with Ukraine has exacerbated the ruble’s drop since the start of the year and the currency’s 8.6 percent fall versus the dollar makes it the second-worst performer among emerging markets tracked by Bloomberg after Argentina’s peso.
Ukrainian Eurobonds due in June rose for a fifth day to 93.22 cents on the dollar. The hryvnia weakened 0.8 percent to 10.10 per dollar.
Putin last month won the authorization of lawmakers to deploy troops in Crimea and southeastern Ukraine to protect the rights of Russian-speakers and those of Russian heritage. A Crimean referendum that backed joining Russia on March 16 was “open and fair,” he said.
“If the dust settles, the ruble has plenty of room for appreciation, especially given that exporters’ offer has been quite thin so far,” Nikitin and Korovin from VTB Capital said.
OAO Aeroflot, Russia’s largest airline, surged 10 percent to 53.92 rubles per share, the most since January 2009. The stock tumbled 24 percent last week. Russia doesn’t plan to cancel overflight fees for foreign carriers on trans-Siberia routes, Interfax reported today citing Deputy Transport Minister Sergey Aristov.
“Aeroflot had fallen a lot more than the market, and today there were reports that Russia may refrain from canceling royalties for flights over Siberia,” Oleg Popov, who helps manage $1 billion of securities for Allianz Investments in Moscow, said by e-mail. “Many people saw this as additional profit for Aeroflot since everybody had already excluded royalties from their forecast models.”
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