Russian Stocks Drop in U.S. on Rekindled Ukraine Concern

Russian stocks fell in the U.S. while the biggest exchange-traded fund tracking the country’s companies pared a weekly gain amid renewed concern that the conflict with neighboring Ukraine is escalating.

The Bloomberg Russia-US Equity Index of the country’s most-traded shares in New York slumped 0.1 percent to 85.15 on Aug. 15. The Market Vectors Russia ETF dropped 0.9 percent to $24.41, erasing a gain of as much as 1.2 percent after Ukraine said its troops attacked and partially destroyed a column of armed vehicles that had crossed the border from Russian territory.

The market reversal came after stocks in Moscow capped the biggest weekly gain since March on speculation Russia was moving toward ending the conflict. President Vladimir Putin pledged on Aug. 14 to “do all we can” to bring the bloodshed to an end in a meeting with political leaders during a visit to the Crimea peninsula he annexed in March.

“It’s a sharp and obvious 180-degree U-turn,” Slava Rabinovich, the chief executive officer at Diamond Age Capital Advisers in Moscow, which manages $240 million in Russian assets, said by phone. “Imagine a similar situation on the border between the U.S. and Canada. What would the markets do? The Russia-Ukraine conflict is that surreal, and yet the unthinkable is the reality now. How it will develop depends on one person -- Putin. And no one knows what he’s thinking.”

Major General Igor Konashenkov, a spokesman for the Defense Ministry in Moscow on Aug. 15 said no military column from Russia crossed into Ukraine, according to the state-run news service RIA Novosti.

Diplomats from both countries reached an agreement yesterday to let a convoy that Russia says is carrying humanitarian supplies cross into Ukrainian territory controlled by separatists under the supervision of the Red Cross. Fighting continued over the weekend as at least 10 people died and eight were wounded by shelling in Donetsk.

International Sanctions

Traders poured $146 million into the Market Vectors Russia ETF from Aug. 11 through Aug. 14, data compiled by Bloomberg show. The biggest U.S. exchange-traded fund tracking the country’s stocks was on pace to lure the largest inflow since the week ended March 28. The ETF gained 2.6 percent last week. The Bloomberg index of the most-traded Russian shares in New York fell to 85.15, paring its five-day gain to 3.2 percent.

“The most worrisome aspect to this escalation is that it increases the prospects of war in the region,” Albert Brenner, who helps manage $5.5 billion as director of asset allocation strategy at People’s United Wealth Management in Bridgeport, Connecticut, said by e-mail. “Although the U.S. and the European Union continue to talk about a diplomatic resolution to the crisis, the unvarnished truth is that Putin has little interest in placating western interests.”

Military Industry

The EU agreed last month to bar Russia’s state-owned banks from selling shares or bonds in Europe and put restrictions on oil and military industry exports. The U.S. followed with penalties against three Russian banks with the goal of accelerating the flight of capital from the $2 trillion economy. The Micex index has fallen 5.7 percent this year. The decline pushed the average price of stocks on the benchmark to 5 times projected 12-month earnings, the cheapest among 21 emerging markets tracked by Bloomberg.

Russia’s gross domestic product expanded 0.8 percent in the three months through June, the weakest pace in five quarters, Federal Statistics Service data showed last week. Citigroup Inc. this week said it expects 0.7 percent growth in 2014, down from a projection of 2.6 percent at the start of the year.

Futures on the dollar-denominated RTS index declined 1 percent to 122,100 in U.S. hours on Aug. 15, the steepest daily drop since Aug. 6. The RTS Volatility Index, which measures expected swings in index futures, increased 9.4 percent to 33.40, the biggest gain since July 21.

“The valuations are low but the geopolitical risk is too high and unpredictable,” Slava Breusov, an analyst at Alliance Bernstein LP in New York, said by phone on Aug. 15. “There is a feeling that a solution of the crisis is not far away, and yet the situation is confusing.”

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