Putin Meetings Spur Russia Equity Rally as Sanctions Seen Easing

  • Micex Index rallies to the highest level since March
  • French President called on U.S., Russia to form alliance

Russian stocks headed toward an eight-month high and the nation’s bonds advanced as President Vladimir Putin’s alliance with the U.S. in the fight against terrorism sparked speculation sanctions will be scaled back.

Natural-gas exporter Gazprom PJSC and Sberbank PJSC led the gains, as seven stocks gained for every one that fell on the benchmark Micex Index. Bonds also climbed, sending five-year yields down the most in a week.

Investors taking cues from the Group of 20 meeting in Antalya, Turkey that ended Monday are buying Russian assets with the view that Putin’s relationship with the U.S. is starting to thaw as the two sides join forces to fight radical Islamist terrorism following attacks in Paris last week that killed at least 129 people. Russia’s economy is in the throes of a recession caused in part by the U.S. and European sanctions over Putin’s alleged role in inciting separatist violence in Ukraine’s easternmost regions.

"The hopes are high at the moment," said Elena Loven, who is adding "liquid and cheap" state-owned companies to the 1 billion-euro ($1.07 billion) stock portfolio she helps manage at Swedbank Robur in Stockholm. "The political risk, that was priced into Russian assets, is declining. Foreigners, who were mostly underweight Russia, are now buying Russian blue chips in a panic."

Russian stocks have dropped more than 30% since Crimea's annexation
Russian stocks have dropped more than 30% since Crimea's annexation

The triggers of the rally were two-fold. Putin and his U.S. counterpart Barack Obama discussed ways to confront Islamic State at the G-20, with Obama noting the importance of Russia’s military efforts in Syria. Both leaders endorsed a plan for a political transition in Syria forged by diplomats in Vienna Saturday who were galvanized by the Paris attacks into reaching a deal.

Ukraine Overture

Putin also said he was prepared to change the payment terms over the $3 billion Ukraine owes his country, giving the government in Kiev until 2018 to settle the debt due on Dec. 20. That’s a U-turn from Russia’s previous stance of demanding repayment in full and on time, or else taking the nation to court.

“The market thinks that if Russia and the West reach a deal on Ukraine and unite on Syria, this may lead to the softening or lifting of sanctions," said Vadim Bit-Avragim, a money manager at Kapital Asset Management LLC in Moscow, who bought stocks last week when the index was in the midst of a six-day slump. “Since the situation with the Russian economy is quite weak and oil is tumbling, Putin has realized that it’s best to de-escalate and improve relations with the West."

The dollar-denominated RTS Index climbed 4 percent on Tuesday after the biggest exchange-traded fund tracking Russian stocks surged 4 percent, the most since late August, in New York trading a day earlier. The Micex Index gained 2.5 percent to 1,783.40 by 4:35 p.m. in Moscow, the highest since March on a closing basis.

Bonds Climb

Bonds rose for the first time in four days, pushing the yield on five-year notes four basis points lower to 10.09 percent.

Brent crude fell 0.7 percent to $44.26 a barrel in London. The ruble weakened 0.4 percent to 65.5080 per dollar, bringing this month’s decline to 2.4 percent. Oil’s 44 percent slide in the past 12 months has hobbled Russia’s economy and strained finances, with the government set to register its biggest budget shortfall since 2010.

The Micex Index trades at an average six times the projected 12-month earnings of its members, compared with a multiple of 11 for the MSCI Emerging Markets Index.

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