Volatility Jumps as Ukraine Cease-Fire Falters: Russia Overnight

Stock volatility rose to a six-year high and traders put the most money into the largest exchange-traded fund tracking Russian equities since 2013 as investors weighed a tenuous Ukraine cease-fire against rebounding oil prices.

Historical 50-day price swings in the dollar-denominated RTS Index of Russian stocks jumped to 72 percent Wednesday, the highest level since early 2009. Traders added $128.6 million to the Market Vectors Russia ETF as of Feb. 17, the most since May 2013, data compiled by Bloomberg show.

The RTS Index rose 3.9 percent, the best performance among 93 primary equity gauges Wednesday, as the ETF jumped to a 10-week high. The gains came even as fighting continued in a strategic crossroads town in eastern Ukraine, imperiling a Feb. 15 cease-fire agreement. The U.S. and its allies blame President Vladimir Putin for supporting pro-Russian rebels in the region. Oil, Russia’s biggest export, has rebounded 14 percent this month, driving a 13 percent gain in the ruble.

“Investors who flocked into Russia are aggressive, brave-of-heart asset managers who tolerate higher risks but demand higher returns,” Andrey Shenk, an analyst at Alfa Capital in Moscow, said by phone Wednesday. “More conservative investors are still waiting for signs not only that Ukraine is stabilizing but that inflation is easing, the ruble is strengthening and economic reforms are being made. We won’t see these signs until at least the end of 2015.”

Ruble’s Rebound

The ruble is still down more than 40 percent since Russia annexed Crimea from Ukraine almost a year ago, provoking the U.S. and its allies to impose sanctions that have pushed the country to the brink of recession. Putin, who personally participated in peace talks last week, denies helping the rebels in the former Soviet republic.

The Market Vectors Russia ETF’s rally is similar to previous reactions to Putin’s indications that he is interested in resolving the conflict. It surged 6.1 percent Sept. 3 as he outlined a peace plan after agreeing to move toward a cease-fire with his counterpart in Kiev, Petro Poroshenko. The fund posted a similar gain on April 17 as representatives from Russia, Ukraine, the U.S. and the European Union said in a joint statement that they’d agreed to “de-escalate tensions and restore security.”

Funds flowed into the ETF this week as the ruble extended the world’s biggest rally and Poroshenko said Ukraine had withdrawn 80 percent of its forces from the transport hub town of Debaltseve, fueling speculation that a turning point in the fighting was imminent. The ETF is still down 20 percent since early March, after the Crimea annexation.

International Sanctions

Oil, which along with natural gas accounts for about half of Russia’s budget revenue, has rebounded after a global supply glut pushed it into a bear market. Brent crude, the grade traders use to price Russia’s main export blend, settled at $60.53 a barrel Wednesday after falling to a six-year low of $46.59 last month.

“Sentiment has improved as oil prices are bouncing and the Ukraine situation is stabilizing in investors’ perception,” Odeniyaz Dzhaparov, a portfolio manager at Deutsche Asset Wealth Management, said by phone from Frankfurt Wednesday. “As the situation calms, it’s driving people to invest in Russia.”

The U.S. and its allies have imposed financing restrictions, export bans and other penalties to punish Putin, who they say is stoking the rebellion by providing weapons, cash and troops. Gross domestic product is projected to contract 4 percent this year .

ADRs Rally

The clash in Debaltseve, a key town on the road that connects Donetsk and Luhansk, is a “massive violation” of the truce reached last week, said German Chancellor Angela Merkel’s chief spokesman, Steffen Seibert.

The Bloomberg Russia-US Equity Index rallied 2.3 percent to 61.69 Wednesday, advancing for the eighth time in nine days. The Market Vectors Russia ETF gained 1.3 percent to $18.19, pushing its gain in the past five trading sessions to 11 percent. The ruble added 1.5 percent to 61.582 in the fourth day of gains.

“Ukraine fighting and related sanctions combine to make two-thirds of Russia’s troubles right now, so investors view the slightest progress as a milestone,” Kirill Yankovskiy, the director of equity sales at Otkritie Capital Ltd. in London, said by phone Wednesday. “Uncertainty is still high and volatility is still there, but as oil prices are rebounding, and the currency stabilized, the market wants to hear that Ukraine tension is also easing.”

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