Russia RTS Index Slumps Into Bear Market as Commodities Retreat

Russia’s dollar-denominated index fell for a second day, entering a bear market on investor concerns commodities may weaken further and curb growth in the world’s biggest energy exporter.

The RTS Index retreated 1.6 percent to 1,301.08 by the close in Moscow, extending declines from this year’s peak on Jan. 28 to 20 percent. The ruble-based Micex Index fell 1.1 percent to 1,326.78 and is trading 15 percent below its January high, while the MSCI Emerging Market Index declined to a 2013 low today and is 8.3 percent below this year’s peak.

“It’s not just the Russia story, it’s the global commodities story that’s upsetting investors,” Bruce Bower, a partner at Verno Capital in Moscow, which manages about $200 million in assets, said by phone today. “The price of oil, metals have been weakening all year, and Russia is very dependent on commodities.”

Crude oil, the nation’s chief export earner, has dropped 3.9 percent from this year’s January high and traded at $94.11 a barrel in New York today. Standard & Poor’s GSCI Index of commodities is down 2.7 percent this year. Russia’s $2 trillion economy is growing at the weakest pace since a 2009 contraction as Europe’s debt crisis curbed exports and companies cut back investment, prompting the Economy Ministry to lower this year’s growth forecast to 2.4 percent from 3.6 percent in April.

Inflation Accelerates

Inflation accelerated for a second month in May to the fastest pace in 21 months, limiting the central bank’s scope to cut interest rates, the Federal Statistics Service in Moscow said yesterday.

Russia’s economy will probably expand 2.3 percent in the second quarter, according to the median estimate of nine economists in a Bloomberg survey. That’s less than the 2.5 percent forecast a month earlier. Russia’s central bank kept its refinancing rate on hold for an eighth month in May.

“It’s hard to get excited about a place like Russia where they haven’t cut rates to stimulate growth,” Bower said.

The Russian May Services PMI index fell to 51.4 from 53 in April, missing estimates, data from HSBC Holdings Plc and Markit Economics show.

OAO Mechel, Russia’s biggest coking coal producer, fell for the sixth day, dropping 7.2 percent to 90.40 rubles, the lowest level since January 2009. The amount of shares traded was 4.4 times the three-month average.

Grid Spending

Federal Grid Co., Russia’s monopoly for high-voltage power transmission, declined 7.5 percent to 10.322 kopeks, the lowest since April 23. The power company is seeking to raise its investment program to 200 billion rubles ($6.2 billion) a year, Chief Executive Officer Oleg Budargin said yesterday. He also proposed increasing OAO Russian Grids’ program to 250 billion rubles a year. The stock sank 4.5 percent to 1.085 rubles.

“The market is reacting negatively to Budargin’s comments,” Sergey Beiden, an analyst at Otkritie Financial Corp. in Moscow, said by phone. “We’re very likely to see much lower tariff growth. An increase in the investment program and a drop in tariffs will lead to the lack of balance in the investment plan,” and the companies would probably have to tap the bond markets, increasing their debt burden, Beiden said.

Utilities lost 2.6 percent on average, the biggest decline among industry groups on the benchmark.

Federal Grid’s investment plans may lead to a 50 percent increase in debt between 2014 and 2016, cutting its free cash flow, VTB Capital said in an e-mailed note today.

Cheapest Stocks

Brent oil advanced 0.5 percent to $103.80 a barrel on the London-based ICE Futures Europe exchange. Urals crude, Russia’s major export blend, climbed 0.1 percent to $102.97.

The volume of shares traded on the Micex was 12 percent below the gauge’s 30-day average, while 10-day price swings plunged to 18.215.

Russian equities have the cheapest valuations among 21 emerging markets tracked by Bloomberg. The Micex trades at 4.9 times its 12-month estimated earnings and has dropped 10 percent this year, compared with a multiple of 10.2 for the MSCI Emerging Markets Index, which has retreated 5.9 percent.

The Russian Volatility Index rose 3.8 percent to 28.19 today. The Bloomberg Russia-US Equity Index of the most-traded Russian companies in the U.S. fell 1.4 percent to 85.99 today.

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