Rout Seen Worsening as ETF Shorts Grow: Russia Overnight

Russian stock traders are bracing for more losses after the benchmark index entered a bear market last week as concern mounted the country’s push to annex Ukraine’s Crimea region will lead to international sanctions.

Wagers that the Market Vectors Russia exchange-traded fund will decline in New York trading reached a 22-month high after the Micex Index fell 7.6 percent in Moscow last week, extending its rout this month to 14 percent. Open interest on put options giving investors the right to sell the ETF reached about 283,000 on March 13, almost double the four-week average and up from a 2014 low of 54,000 in January, data compiled by Bloomberg show.

The U.S. and the European Union are threatening sanctions if Russia doesn’t back down from annexing Crimea, where preliminary results show people voted yesterday to rejoin their former Soviet master two weeks after President Vladimir Putin dispatched troops to take control of the region. Stock trading volumes have soared as tensions escalated. Trading on the Moscow Exchange reached a record last week, while 27.5 million of the most-traded Russian shares changed hands each day in New York this month, 2.4 times the norm over the past year.

“We’ve seen increasing flow in both ways,” Ramon Verastegui, head of engineering and strategy at Societe Generale SA in New York, said by e-mail March 14. “Put buying is picking up as hedges in case the crisis worsens.”

The Bloomberg Russia-US Equity Index of the most-traded Russian stocks in the U.S. and the Market Vectors Russia ETF, the biggest U.S. exchange-traded fund that holds Russian shares, both sank for a fourth straight week. The Bloomberg Russia gauge declined 5 percent to 78.52 in the five days to March 14 and the Market Vectors fell 5.5 percent to $21.81. The Micex gauge has slumped 21 percent from a January 2013 high through the end of last week. It traded up 1.3 percent at 1,252.88 by 11:24 a.m. in Moscow today.

Equity Inflows

More than 95 percent of voters in the Black Sea peninsula back leaving Ukraine to join Russia in the referendum, preliminary results show. The Ukrainian government, the EU and the U.S. consider the vote illegal, while Russia said it “fully met international norms.” Turnout was 82.7 percent, according to the election commission.

As the West threatens to ratchet up sanctions if Russia doesn’t back down from annexing Crimea, Russia has deployed about 60,000 troops along the Ukrainian border, the government in Kiev said. Ukraine closed border crossings to Russia and will mobilize as many as 15,000 volunteers in the next two weeks to defend the nation, officials said yesterday.

‘Great Opportunity’

Global investors poured money into Russian equity funds for a second week as of March 12, injecting $133.2 million and ending 11 weeks of declines, according to EPFR Global data. Inflows rose after Russian forces took Crimea under control, the data show. ETFs accounted “for the bulk of the inflows,” pointing to short interest, Cameron Brandt, the director of research for Cambridge, Massachusetts-based EPFR Global, said March 14.

A short sale is one in which stock is borrowed and sold, with the hope of profit by repurchasing the shares later at a lower price. Year-to-date, outflows from Russia Equity Funds totaled $702 million, the worst start to a year since EPFR Global began tracking them in 1996, Brandt said by e-mail.

The Moscow Exchange said daily trading volumes in equities rose to a record-high 72 billion rubles ($2 billion) in the first two weeks of March, compared with an average of 35 billion for 2013, data compiled by the exchange show.

American depositary receipts of OAO Gazprom, Russia’s biggest company, dropped 12 percent in New York this month to $6.72 and traded at 2.6 times estimated earnings, the cheapest level among global peers.

‘Violence and Intimidation’

“War is a time to buy,” Anvar Gilyazitdinov, who manages a $10 million portfolio of Russian stocks, including Gazprom, at Rye, Man & Gor Securities in Moscow, said by phone March 14. “All this panic selling will be over very soon and the market will rebound. It’s a great opportunity to buy.”

In Washington, the White House said in a statement the international community “will not recognize the results of a poll administered under threats of violence and intimidation from a Russian military intervention.”

U.K. Foreign Secretary William Hague called the vote “illegal, unconstitutional and illegitimate.” In an e-mailed statement, Hague said the EU would need to make “a firm and united response” to Russia.

“The next question is how severe the sanctions against Russia and what kind of measures it will approve in response,” Igor Rubin, head of trading at Otkritie Financial Corp. in Moscow, said by phone on March 14.

The dollar-denominated RTS Index tumbled 8.3 percent last week to a 2009 low of 1,062.47. Futures on the gauge added 1.8 percent to 107,080 in U.S. hours. The RTS Volatility Index, which measures expected swings in futures, added 4 percent to 60.86 today.

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