Putin Sanctions Order Spurs Plunge in Russian ADRs

Russian stocks plunged to a three-month low in U.S. trading as President Vladimir Putin signaled that he plans to retaliate against international sanctions threatening to hurt the nation’s $2 trillion economy.

The Bloomberg Russia-US Equity Index fell 2.1 percent to 82.25 in New York yesterday, its seventh drop in nine sessions. The decline pushed the average price of stocks on the gauge to 5.6 times projected 12-month earnings, the lowest in three months. Mining company OAO Mechel and natural-gas producer OAO Gazprom were the worst performers, each tumbling more than 3.5 percent. Lender OAO Sberbank fell 3.2 percent.

Stocks sank as Putin ordered the government to prepare a response to U.S. and European Union sanctions for his support of a rebellion in eastern Ukraine. The latest round of measures targeted the banking and energy industries with financing restrictions and export bans. Putin is showing no signs of backing down. The deputy head of Ukraine’s National Defense and Security Council said Aug. 4 that he was concerned about a buildup of 33,000 Russian troops and 160 tanks near the border.

“The threat of an escalation in tit-for-tat sanctions is further damaging investor sentiment toward Russia and is keeping the risk premium near record-high levels,” Chris Weafer, a senior partner at Moscow-based consulting firm Macro Advisory, wrote in an e-mail yesterday. “Until these threats are removed and existing sanctions start to ease, a majority of emerging-market funds will continue to steer clear of Russia risk regardless of the cheap valuations available.”

Troop Buildup

Polish Foreign Minister Radoslaw Sikorski warned that a renewed buildup of Russian troops on Ukraine’s border raises the specter of a possible invasion. He spoke in an interview with TVN24 BiS yesterday and gave no indication an incursion was imminent.

The benchmark Micex Index trades at 4.8 times estimated earnings, the cheapest among 21 emerging markets tracked by Bloomberg. Investors have pulled $91 million out of the Market Vectors Russia ETF in the past month, the second-most among U.S. exchange-traded funds that track emerging-market assets, data compiled by Bloomberg show.

Putin commented on a possible response to the international sanctions during a meeting with Alexey Gordeev, governor of the Voronezh region near Ukraine, after the close of trading in Russia. Stocks fell 1.5 percent in Moscow yesterday as Vedomosti reported that Russia is considering striking back by preventing European airlines from crossing the country’s airspace.

Growth Projection

The Russian government had expected gross domestic product to expand this year at the slowest pace since 2009 even before the latest round of sanctions. The International Monetary Fund said July 24 that the economy will expand 0.2 percent this year after increasing 1.3 percent in 2013.

“The economy has been already slowing, and with the sanctions now in place we are facing a risk of recession,” Kirill Chuyko, head of equity research at BCS Financial Group in London, said by phone yesterday. “While the Ukraine crisis is far from being solved, market sentiment is very negative and valuations of Russian equities are already lower that those of Argentina, a country that just defaulted on its debt.”

Argentina’s Merval index trades at 8.9 times estimated earnings. The gauge has declined 9.8 percent since July 30, when the country defaulted on its debt for the second time in 13 years.

Mechel plunged 3.7 percent to $1.80 in New York yesterday. Gazprom dropped 3.6 percent to $7.02. Sberbank decreased to $8.05, the lowest since March 13. United Co. Rusal, the world’s biggest aluminum producer, dropped 0.5 percent to HK$4.02 at 10:43 a.m. in Hong Kong trading.

‘Irrelevant’ Valuations

The Market Vectors Russia ETF, the largest U.S. exchange-traded fund tracking the nation’s companies, slipped 3.4 percent to $23.51, a three-month low. The RTS Volatility Index, which measures expected swings in index futures, increased 2.9 percent to 39.33.

Futures on the dollar-denominated RTS index dropped 0.8 percent to 117,700 in U.S. hours. Contracts on Sberbank’s Moscow-listed stock expiring in September fell 0.7 percent to 72.08 rubles. Gazprom futures declined 0.5 percent to 128.10 rubles.

“There is no doubt the threat level is rising by the day,” said Macro Advisory’s Weafer, who was rated by a Euromoney Institutional Investor Plc poll as Russia’s best equity strategist in 2013. “Putin has moved from complaining about sanctions to issuing a clearer threat of retaliation. Risk dominates. Valuations are irrelevant for now. Markets and the ruble look set to trade lower in the coming days.”

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