World’s Best Rally in Russia Halted as Ukraine Heats Up

Russian stocks trading in New York fell the most in four weeks amid renewed concern over the situation in eastern Ukraine. The retreat followed losses in Moscow, paring gains that made the RTS Index the world’s best-performing equity gauge in May.

The dollar-denominated RTS fell 2.9 percent to 1,297.50 yesterday, the biggest drop since April 15. The decline trimmed this month’s gain to 12 percent, still the strongest among 93 equity benchmarks globally. The Bloomberg index of the most-traded Russian shares in the U.S. slipped 0.8 percent, paring its May advance to 9.7 percent. Futures on the RTS index added 0.3 percent in U.S. hours.

Fighting intensified in eastern Ukraine yesterday with the government saying it inflicted “significant” losses on pro-Russian rebels a day after President-elect Petro Poroshenko vowed to wipe out the separatists. Tension that surged after Russia’s March incursion into Crimea had been easing as investors speculated Poroshenko would pursue dialog with Moscow. Now concern over the situation on the ground is re-emerging following the May 25 election in Ukraine, according to UralSib Financial Corp.

“The Ukraine situation is worsening as there is a full-scale military operation in the east and the uncertainty is colossal,” Slava Smolyaninov, chief strategist at UralSib Financial in Moscow, said by phone yesterday. “It looks like most investors forgot about the risks and focused on Ukraine electing a new president in the first round of voting.”

The RTS gauge has to sink about 11 percent from yesterday’s close to look attractive for buyers, Smolyaninov said.

Fund Inflows

Investors added $54.7 million into the Market Vectors Russia exchange-traded fund last week, the biggest inflow since the five days ended May 2, data compiled by Bloomberg show. The fund, the largest U.S.-based ETF investing in the nation’s shares, fell 2 percent to $25.20 yesterday, reducing this month’s advance to 11 percent.

“For a sustainable gain, it would require deescalation in Ukraine and the risks are still there,” Walter “Bucky” Hellwig, who helps manage $17 billion at BB&T Wealth Management in Birmingham, Alabama, said by phone yesterday. “There are risks of additional territorial claims by Russia, which would be negative for the Russian market.”

‘Colossal Mistake’

Troops killed “dozens” of rebels without suffering any losses, Interior Minister Arsen Avakov said yesterday, while the mayor’s office in Donetsk said 40 people died and 31 were wounded. The self-proclaimed Donetsk People’s Republic asked Russian President Vladimir Putin for humanitarian and military help, separatist leader Denis Pushilin said. Russian Foreign Minister Sergei Lavrov said any escalation would be a “colossal mistake.”

Russia’s $2 trillion economy is already in a recession, according to the International Monetary Fund. The IMF cut the country’s economic forecast for a second time earlier this month, predicting full-year growth will slow to 0.2 percent from 1.3 percent last year.

The Micex Index in Moscow trades at 5.2 times estimated 12-month earnings, compared with a valuation of 15.1 for India’s S&P BSE Sensex Index and 10.2 for Brazil’s Ibovespa. The Russian gauge fell the most since April 15 yesterday, declining 2.2 percent to 1,417.32 in Moscow.

The RTS Volatility Index, which measures expected swings in the stock-index futures, fell 1.2 percent to 27.31 in U.S hours. Moscow-based United Co. Rusal, the world’s biggest aluminum producer, rose 2.8 percent to HK$3.33 at 10:44 a.m. in Hong Kong trading, heading for the largest gain since May 2.

“We’re getting back to levels we had back in February before we had the big selloff,” Jan Dehn, head of research at Ashmore Group, said by phone from London yesterday. “The Russian market still has upside. We are at a point of relatively high bearishness about Russia and that suggests that there is upside longer term.”

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