Micex Drops to Seven-Week Low as Attack on Jet Deepens Tension

The Micex Index fell to a seven-week low after the shooting down of a Malaysian Airlines jet over Ukraine heightened tension between Russia and the U.S. and its European allies.

The gauge slid 1.3 percent to 1,422.53 by the close in Moscow, the lowest level since May 27 and the fifth day of declines. It’s the worst weekly drop since the five days through April 25. OAO Sberbank, the nation’s biggest lender, decreased 1.5 percent to a two-month low. OAO Aeroflot, the largest airline, fell 5.1 percent.

The jet was shot down yesterday over eastern Ukraine killing all 298 people on board. U.S. President Barack Obama said today the missile was fired from an area controlled by Russian-backed separatists, though they deny the accusation. Russian markets tumbled yesterday after the U.S. imposed new sanctions on companies to punish President Vladimir Putin for failing to end support for the insurgency.

The plane crash “highlights risks associated with the situation in eastern Ukraine,” Slava Smolyaninov, an equity strategist at UralSib Capital in Moscow, said in e-mailed comments. “Investors will demand higher premiums, a clear negative for the market from the fundamental standpoint.”

JPMorgan Chase & Co. recommended investors sell Russian equities, citing the latest sanctions as the catalyst, after saying last month it was time to buy.

Aeroflot fell the most since April 15 as Russian airlines stopped using Ukraine airspace for transit flights after the crash. They are discussing whether to cancel regular flights to Ukraine, Russia’s state aviation agency said on its website.

Extra Costs

“Aeroflot and other airlines will have to bypass Ukraine, find alternative routes,” Denis Vorchik, an analyst at UralSib in Moscow, said by phone. “This means extra time and extra fuel costs.”

The Micex trades at 5.2 times 12-month estimated earnings, the cheapest valuation among 21 emerging markets tracked by Bloomberg. The dollar-denominated RTS Index retreated 1.8 percent to 1,276.28, the lowest level since May 16.

OAO Gazprom, Russia’s biggest gas producer, fell 0.5 percent, an eighth day of declines and the longest losing streak since January 2006.

Evidence that separatists shot down the Malaysian passenger jet is likely to bolster European Union support for a tougher stand against Russia, said two U.S. officials who asked not to be named because they weren’t authorized to speak publicly.

‘Meaningful’ Sanctions

“The U.S. sanctions were, for the first time, meaningful,” Joseph Dayan, head of markets at BCS Financial Group in London, said in e-mailed comments. “But so far it’s been unilateral. If this event is a catalyst for the EU imposing meaningful sanctions, then the market might need to price in a higher risk premium, wider credit spreads, higher financing costs and so on.”

OAO Rosneft, the nation’s biggest oil producer, dropped 0.8 percent and OAO Novatek, the second-largest natural gas producer, fell 1 percent. Both companies, along with OAO Gazprombank and OAO Vnesheconombank, were included in the U.S. sanctions list on July 16.

Magnit Declines

OAO Magnit, Russia’s biggest food retailer, retreated 1.7 percent, the second day of declines. The drop curbed Magnit’s 6.9 percent gain this month.

“Magnit will always lead the way down in days like this since it’s the one international investors hold,” Dayan said.

AFK Sistema retreated 2.5 percent. It was cut to neutral at Bank of America Merrill Lynch, with analysts citing a potential delay in the additional share placement of OAO Bashneft because of a regulatory restriction on transactions in the oil producer’s shares. The stock dropped 6 percent.

Russia-dedicated stock funds posted $96 million in the week ending July 16, UralSib Capital said in an e-mailed note, citing EPFR Global data.

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