Sanctions Squeezing Poised for Worst Annual Slump Group Ltd. is headed for its largest annual decline as international sanctions and tightening government control over the Internet hamper the operator of Russia’s biggest social networks.

Shares of the company, which reports second-quarter earnings tomorrow, have declined 29 percent this year, putting them on track for the largest slump since their debut in 2010., controlled by billionaire Alisher Usmanov, rose 1.8 percent to $31.57 in London yesterday, while the Bloomberg index of the most-traded Russian stocks in New York gained 1.1 percent to 87.93. Yandex NV, the owner of Russia’s biggest Internet search engine, extended its 2014 plunge to 30 percent.

Sales at will increase 27 percent in 2014, the slowest pace since 2008, according to the mean of 16 analyst estimates, as Russia tries to prevent its $2 trillion economy from contracting amid U.S. and European sanctions linked to the Ukraine conflict. President Vladimir Putin has responded by barring some food imports and by limiting anonymous access to the Web. In April, he called for tighter regulation of the Internet, which he deemed a creation of American spy agencies.

“’s customer asks himself these days if he should spend $10 for an e-card on a social network or put that money toward his food budget,” Konstantin Chernyshev, head of research at UralSib Capital in Moscow, said by phone. “The company’s guidance during Friday’s earnings call will be important. Will it be able to meet its revenue targets for 2014 or will it cut its sales forecast? I don’t rule out lowering Mail’s sales estimate for this year.”

Price Estimate

UralSib has a hold rating on, while 20 of 23 analysts covering the company still recommend investors buy the stock. The average analyst 12-month price estimate has decreased to $40.74, the lowest level since October, data compiled by Bloomberg show., which makes most of its revenue in the domestic market, is facing headwinds as Russia’s economy expanded 0.8 percent in the second quarter, matching the slowest pace since a contraction in 2009. Growth in retail sales remained near the lowest since January 2010, while inflation accelerated to 7.5 percent in July, staying above the central bank’s target for a 23rd month.

The company operates social websites Odnoklassniki (“Classmates”) and Moi Mir (“My World”) and controls VKontakte, the nation’s biggest social networking site. It also owns, Russia’s largest Internet portal, and the nation’s biggest online games platform.

Domestic Companies

Russia is one of the few countries where domestic companies beat U.S. competitors in search, e-mail, social networks and games, according to Chief Executive Officer Dmitry Grishin. VKontakte had 95 million users at the end of 2013, including 61 million in Russia, while Odnoklassniki had 54 million, researcher ComScore estimated. This compares with 13 million Russian users of Facebook Inc.

In a drive to control electronic information, the government banned anonymous access to the Internet in public spaces beginning this month. New legislation approved in May also requires companies to store Russian users’ information on servers inside the country, similar to Chinese regulations. It subjects bloggers with more than 3,000 readers to the same liabilities as media companies.

“Tightening control over the Internet combined with the deteriorating economic outlook amid international sanctions are further worsening investor sentiment,” Timur Nigmatullin, an analyst at Investcafe LLC in Moscow, said by phone yesterday. “If the Ukraine crisis deteriorates, there is a risk of further sanctions.”

Death Toll

Ukraine’s National Guard said yesterday it captured the eastern city of Ilovaysk, as the death toll from the conflict, already more than 2,000, mounted further. Putin will have talks with Ukrainian President Petro Poroshenko on the sidelines of a Customs Union meeting in Belarus next week, the Kremlin said Aug. 19 in an e-mailed statement.

The Market Vectors Russia ETF, the largest dedicated Russian exchange-traded fund, slipped 0.4 percent to $25.14 yesterday. Yandex slumped 1.8 percent to $30.17.

RTS index futures expiring next month dropped 0.1 percent to 125,250 in U.S. hours, and the RTS Volatility Index, which measures anticipated swings in stock futures, fell 0.3 percent to 31.57. Moscow-based United Co. Rusal fell 0.3 percent to HK$4.05 at 10:40 a.m. in Hong Kong trading.

“Investors are no longer sure how Russia perceives her interests,” Gary Greenberg, an emerging-markets money manager who helps oversee 26.9 billion pounds ($45 billion) at Hermes Fund Managers Ltd., wrote in an e-mail from London. “Political ambitions, domestic and strategic, may trump prudent economic policy. There is a lot of hope in the market that the conflict will begin, slowly, to resolve.”

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