Obama’s Sanctions Sink Russian Stocks as Novatek Declines
Russian stocks traded in New York fell the most in two weeks as President Barack Obama imposed financial sanctions on a wider swath of Russian officials, including billionaires close to President Vladimir Putin.
The Bloomberg Russia-U.S. Equity index of the most-traded Russian shares in the U.S. dropped 3.3 percent to 80.10 in New York yesterday. The measure extended declines after Standard & Poor’s reduced its credit outlook on Russia. Futures on the RTS Index sank 2.8 percent at 1:44 p.m. in Moscow today. OAO Novatek, Russia’s largest private gas producer, dropped 7.5 percent in London, while the stock in Moscow fell 8.9 percent.
The Treasury Department’s sanction list affects officials including Gennady Timchenko, who controls Novatek, Yury Kovalchuk, who owns Bank Rossiya and CTC Media Inc., and Putin’s former judo partner Arkady Rotenberg, an investor in road builder OAO Mostotrest. Obama also signed a new executive order authorizing, though not implementing, sanctions affecting parts of the Russian economy, which he didn’t specify.
“People will continue to move money out of Russia,” Paul Zemsky, the New York-based head of multi-asset strategies at ING U.S. Investment Management, which oversees $200 billion, said in a telephone interview yesterday. “There are plenty of other places to go, which are cheap and more predictable than Russia. The Russian market doesn’t look so cheap for taking on all that uncertainty.”
CTC Media fell to the lowest level in more than a year in New York yesterday.
Obama’s sanctions and the S&P outlook cut come amid mounting concern that Russia’s economic growth is decelerating. Growth in gross domestic product slowed to 1.3 percent last year, the weakest pace since a contraction in 2009. Even before the U.S. and the European Union imposed sanctions, Deputy Economy Minister Sergei Belyakov said March 17 the economy was showing signs of “crisis.” S&P lowered Russia’s growth forecast to 1.2 percent this year.
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. Reacting to the sanctions, Russia banned entry to nine U.S. officials, including House Speaker John Boehner and Senator John McCain.
The geopolitical tensions have sent the benchmark Micex Index into a bear market, with the measure dropping 14 percent this year. The Micex lost 2.2 percent today. The Russia-US Index has declined 22 percent so far in 2014, the worst start to the year since Bloomberg started tracking the gauge in 2005.
Capital outflows from Russia have increased 60 percent this year to $45 billion from the first quarter of last year, Goldman Sachs Group Inc.’s economists, led by Clemens Grafe and Andrew Matheny, wrote in a March 13 report.
The Micex is the cheapest among 21 developing countries monitored by Bloomberg, trading at 4.8 times estimated earnings, compared with 9.1 times estimated earnings for the MSCI Emerging Markets gauge.
The ruble fell for the first time in five days yesterday, declining 0.7 percent to 36.38 per dollar before trading little changed today. The currency is the worst performer this year after the Argentine peso among 24 emerging markets tracked by Bloomberg.
CTC, the nation’s only listed media company, dropped 4.7 percent to $8.71, the lowest since January 2013. Global depositary receipts of Novatek slid to $98.45 today in London, set for the lowest close since November 2012, on volume 2.5 times the three-month daily average.
The Market Vectors Russia ETF (RSX), the biggest U.S. exchange-traded fund that holds Russian shares, erased gains of as much as 2 percent, falling 2.6 percent to $22.09 yesterday. The RTS Volatility Index, which measures expected swings in futures, surged 14 percent to 56.43 today.
Obama said Russia’s incursion into Ukraine and continuing military movements carry “dangerous risks of escalation” and must be met by unified global opposition.
“We’re imposing sanctions on more senior officials of the Russian government,” Obama said on the South Lawn of the White House. “In addition, we are today sanctioning a number of other individuals with substantial resources and influence who provide material support to the Russian leadership, as well as a bank that provides material support to these individuals.”
Obama’s action against 20 individuals adds to the list of seven top Russian officials and four people from Ukraine who previously were subjected to sanctions. It also includes Bank Rossiya in St. Petersburg, which officials said has $10 billion in assets and is the 17th largest bank in Russia.
S&P reduced Russia’s credit outlook to negative from stable, citing geopolitical and economic risks.
“The prospect of U.S. and EU economic sanctions following Russia’s incorporation of Crimea could reduce the flow of potential investment, trigger rising capital outflows, and further weaken Russia’s already deteriorating economic performance,” S&P said.
The U.S. Treasury said Putin is an investor in Gunvor Group Ltd., a little-known Swiss oil company, a charge that threatens to bring upheaval to global energy markets. The oil-trading company was founded in 2000 and handled crude mostly from Russia and flowing to Europe. With 2012 revenue of $93 billion, it’s now one of the world’s largest commodity traders, employing more than 1,600 people and sourcing crude from more than 35 countries.
Gunvor’s $500 million of notes due in 2018 slumped yesterday, sending the yield soaring 3.41 percentage points to 10.91 percent, the highest since the securities were sold last May, according to data compiled by Bloomberg. The yield was at 11.02 percent today.
Yields on Russia’s Eurobonds maturing in September 2023 climbed seven basis points today 5.49 percent, after climbing 16 basis points yesterday.
“There is a lot of room to fall for the market, given that the conflict is escalating and the U.S. sanctions now target private business, particularly those affiliated with billionaires on the list,” Mansur Mammadov, a money manager at Kazimir Partners in Moscow, which oversees $300 million in emerging-market equities, said by phone yesterday. “The sanctions may result in a massive selling unseen in Russia before.”
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