CTC Media Inc., whose billionaire co-owner is among Russians targeted by U.S. sanctions, is heading to its biggest quarterly selloff since 2011 as the economic slowdown threatens to crimp television ad revenue.
The stock has lost 36 percent in New York trading this year, leading the 20 percent decline in the Bloomberg index of the 14 most-traded Russian shares in the U.S. RTS stock-index futures retreated 1.5 percent to 114,260 in the U.S. hours on March 28.
Concern is mounting that Russia could slip into a recession after President Vladimir Putin’s annexation of Crimea prompted the U.S. and Europe to impose financial sanctions on the country. Yury Kovalchuk, who controls CTC through a 25 percent stake, was made a subject of the sanctions because he’s a close adviser to Putin. CTC, the operator of the nation’s fifth-most watched TV station, depends on ad sales for 98 percent of its revenue.
“CTC is being hit by a combination of several negative factors, including the economic slowdown in Russia, which will almost inevitably lead to lower ad budgets and lower revenue for media companies,” Sergey Libin, an analyst at Raiffeisenbank AG in Moscow, said by phone on March 28. “CTC has also been badly affected by the political crisis.”
Libin cut his recommendation on CTC to hold from buy on March 17.
U.S. Secretary of State John Kerry said Russia must pull forces back from Ukraine’s border as both sides seek a diplomatic solution, while his Russian counterpart urged the government in Kiev consider devolving power to give Ukraine’s regions more autonomy.
During four hours of meetings yesterday in Paris with Russian Foreign Minister Sergei Lavrov, Kerry said “ideas and suggestions” were discussed and he would consult with President Barack Obama on next steps. He and Lavrov, at separate briefings, said the sides would hold further talks to seek an outcome acceptable to Ukraine.
Kovalchuk controls CTC through his Telcrest Investment Ltd. and also owns Ren-TV and Channel 5 in Russia. His St. Petersburg-based OAO Bank Rossiya, the nation’s 17th biggest lender, became the first financial institution to face U.S. sanctions over the Ukrainian crisis this month.
Putin’s move to annex Crimea following the ouster of his ally Viktor Yanukovych from the Ukrainian presidency last month has pushed Russia and the West into their worst crisis since the end of the Cold War.
Putin called Obama on March 28 to talk about a U.S. proposal to resolve the conflict. Obama told Putin that a diplomatic solution “remains possible only if Russia pulls back its troops and does not take any steps to further violate Ukraine’s territorial integrity and sovereignty,” the White House said.
The U.S. Senate on March 27 passed legislation providing financial aid to Ukraine and expanding sanctions on Russian officials. The House of Representatives will vote tomorrow on the Ukraine bill, Megan Whittemore, a spokeswoman for Majority Leader Eric Cantor, a Virginia Republican, said March 28.
The World Bank last week cut Russia’s gross domestic product growth estimate to 1.1 percent for 2014 from 3.1 percent expected earlier. Capital outflows of as much as $150 billion this year may push the $2 trillion economy to contract as much as 1.8 percent, it said on its official website on March 26.
“Global risks are expected to remain prominent with continuing higher overall market volatility,” Birgit Hansl, World Bank’s lead economist for Russia, said March 26, according to a statement on the website. “The high-risk scenario assumes a more severe shock to economic and investment activities if the geopolitical situation worsens.”
Growth in Russia’s $9.2 billion advertising market will slow to about 6 percent in 2014 if the economy continues to grow, Raiffeisen’s Libin said. That compares with a 10 percent expansion in 2013, according to data by the Association of Communication Agencies of Russia, or AKAR.
Television ads, which account for half of the Russian ad market according to AKAR, will decelerate more than any other segment of the industry, because they are the most expensive. Online ads, which are cheaper, will slow the least should economic growth decrease, Boris Vilidnitsky, an analyst at Barclays Plc, said by phone from London on March 28.
Yandex NV, Russia’s biggest Internet company, has plunged 32 percent this year, wiping out $4.5 billion in market capitalization. The Hague-based Yandex made 99 percent of its revenue from ad sales as of the third quarter of last year, data compiled by Bloomberg show.
Yandex, the online search engine whose market share in Russia is twice that of Google Inc.’s, increased its audience to 62.1 percent this month, compared with 61.9 percent in February, LiveInternet’s data show. Google’s share was at 27.3 percent in March, up from 27.2 percent.
“I would strongly recommend buying Yandex at these levels if we knew for sure that Putin is not going into the rest of Ukraine and was satisfied with just Crimea,” Barclays’s Vilidnitsky said. “The problem is that there is next to no predictability. Many investors are simply scared and avoid exposure to Russia all together for now.”
The Micex Index added 0.4 percent to 1,349.46 by 10:11 a.m. today. The Market Vectors Russia ETF, the biggest U.S. exchange-traded fund that holds Russian shares, has slumped 21 percent this quarter to $22.90. The RTS Volatility Index, which measures expected swings in futures, increased 1.2 percent to 38.79 today.