Russian Stocks’ Oil Link Gains on Eased Ukraine Concern

Russian stocks are showing the strongest link to oil prices in more than a year as concern that the Ukraine crisis will escalate fades and investors focus on a main driver of economic growth.

The dollar-denominated RTS stock index rose 4.9 percent in Moscow last week, pushing its 35-day correlation coefficient with West Texas Intermediate crude to 0.53, the highest since May 2013. A reading of 1 implies two securities are trading in lockstep, while -1 signals the opposite.

Oil is Russia’s top export and along with natural gas contributes about half its budget revenue. The RTS index had a negative correlation coefficient of as much as 0.37 in March as stock-market volatility surged during the country’s standoff with Ukraine. The link between crude and equities is returning to more typical levels as tensions ease. President Vladimir Putin met with the former Soviet republic’s new leader on June 6, easing concern that the conflict will intensify.

“Investors are less worried about Ukraine and paying more attention to the normal drivers,” Mattias Westman, who oversees about $3.3 billion in Russian assets as chief executive officer at Prosperity Capital in London, said by phone on June 6. “Oil prices are very important for the Russian economy and many Russian companies. The market is very attractively priced.”

Bull Market

The Micex Index trades at 5.4 times projected 12-month earnings, compared with a multiple of 11 for the MSCI Emerging Markets Index. The benchmark Russian stock gauge entered a bull market last week, rising 20 percent from its March 14 low during the Ukraine crisis. West Texas Intermediate crude gained 3.8 percent during that span.

Putin and Ukraine President-elect Petro Poroshenko met briefly during D-Day commemorations in France. The Russian leader also had an “informal conversation” with U.S. President Barack Obama in their first face-to-face meeting since the onset of the crisis last year, according to government officials.

“The market takes the Putin-Poroshenko meeting as a signal of further de-escalation in Ukraine, even though we are not completely out of the woods yet,” Vladimir Tikhomirov, chief economist at BCS Financial Group in Moscow, said by phone on June 6. “Russia depends a great deal on oil and commodities prices, and as the political risk is decreasing people pay more attention to that. The correlation is coming back as investors return to the market.”

WTI may fall next week amid concern that demand will be weaker, according to analysts and traders surveyed by Bloomberg. Seventeen of 34 estimated futures will decrease through June 13 while seven predicted a price gain. The Energy Information Administration reported June 4 that crude may rise as U.S. inventories decline.

‘Very Attractive’

The European Central Bank’s decision on June 5 to cut the main refinancing rate also will benefit Russian stocks, according to Tikhomirov. “Russia is the cheapest emerging market, and as appetite returns for riskier assets with the ECB decision on rates, valuations look very attractive,” he said.

ECB officials cut the main refinancing rate to a record 0.15 percent and moved the deposit rate below zero for the first time.

WTI has increased 4.3 percent this year in New York, while Brent crude fell 2 percent to $108.61 a barrel on the London-based ICE Futures Europe exchange.

OAO Surgutneftegas, Russia’s third-biggest oil producer, was the best performer among the most-traded Russian stocks in the U.S. last week, rallying 12 percent to $8.05, the highest since April 2007. The Bloomberg Russia-US Equity Index rose 5.3 percent last week to 92.32.

Gas Prices

Russian Energy Minister Alexander Novak said on June 4 that “fair” domestic prices on natural gas supplies should be at least 51 percent higher than the current price. The government controls gas prices and has been considering raising them since 2006.

OAO Gazprom, Russia’s biggest company, increased 2.2 percent in New York last week to $8.35, the highest since May 23. United Co. Rusal, a Moscow-based aluminum producer, rose 0.9 percent to HK$3.53 in Hong Kong trading as of 9:32 a.m. local time.

The Market Vectors Russia ETF, the largest dedicated Russian exchange-traded fund, gained 5 percent last week to to $26.36, the highest since January. RTS stock-index futures expiring this month fell 0.1 percent to 134,560 in the U.S. on June 6.

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