Russia ETF Inflows Surge as Ukraine Tension Fades

The biggest U.S. exchange-traded fund that holds Russian shares surged the most in two years as inflows increased on signs President Vladimir Putin is seeking to ease tension with Ukraine.

The Market Vectors Russia ETF gained 11 percent in May, the first advance in five months and the steepest since January 2012. The Bloomberg Russia-US Equity Index of the most-traded Russian stocks in the U.S. rallied 9.3 percent last month, led by OAO Sberbank, eastern Europe’s largest lender, and Internet company Yandex NV. The gauges followed the Micex Index’s 9.7 percent May increase, the biggest since 2011.

Investors had dumped Russian stocks earlier this year as Putin moved to annex the Black Sea Crimean peninsula, pushing the Micex down 13 percent in the first four months of 2014 and leaving Russian equities at their cheapest versus the MSCI Emerging Market Index since 2008. With Ukraine electing a new president on May 25, net inflows from U.S.-based ETFs surged to $152.5 million last month, 12 times the April total, data compiled by Bloomberg show.

“Investors are interested in Russia again,” Ivan Manaenko, the head of research at Veles Capital LLC in Moscow, said by phone on May 30. “People believe that there will be some compromise found in Ukraine, following the presidential election and Russia’s promise to work with the new leader. Russian equities look cheap as the political risks seems to be decreasing.”

Fund Inflows

Companies on the Micex Index trade at an average valuation of 5.2 times estimated earnings, a 53 percent discount to the multiple for stocks on the MSCI Emerging Markets gauge, according to data compiled by Bloomberg. The discount was 57 percent a month ago, the biggest since the end of 2008.

Investors poured a net $79 million into all Russia-dedicated funds in May, a sign of long-term buying, said Cameron Brandt, research director at EPFR Global, a Cambridge, Massachusetts-based company that tracks fund flows.

“This is the first sign of some green shoots in a long time,” Brandt said by phone May 30. “If Russia stays away from Ukraine, people will see it as oversold. If you discount the political risk, Russian equities are cheap.”

Russia-dedicated equity funds reported outflows every month from August 2013 through February 2014 as well as in April 2014, according to data compiled by EPFR Global. The funds drew $380 million in March as investors were shorting Russian stocks ahead of the annexation of Crimea that month, Brandt said.

Russian Forces

Futures on the dollar-denominated RTS Index slipped 0.1 percent to 128,260 in U.S. hours on May 30. The RTS Volatility Index, which measures expected swings in the futures, increased 1.2 percent to 25.75.

American depositary receipts of Sberbank jumped 20 percent in May, the best performance in 28 months. Shares of Yandex, Russia’s biggest search engine, surged 18 percent, trimming the 2014 decline to 28 percent.

A “majority of the Russian forces” have been withdrawn from the Ukrainian border, Rear Admiral John Kirby, a Pentagon spokesman, told reporters on May 30.

Confirmation of Russia’s partial withdrawal emerged hours after separatist rebels downed a military helicopter in eastern Ukraine, killing a general and 13 troops. Ukraine has intensified its battle to keep hold of the nation’s easternmost regions last week, with separatists in Donetsk and Luhansk seeking to break away and join Russia after a pro-European cabinet took charge in Kiev.

“The market focus is still on Ukraine,” Veles Capital’s Manaenko said. “While investors appreciate Russian equities being so cheap, they are closely looking as the Ukrainian army steps up its attempt to retake control over the Donetsk and Luhansk regions.”

Before it's here, it's on the Bloomberg Terminal. LEARN MORE