Crude Gains Outweigh Ukraine as Russian ADR Volatility Declines

Stock investors’ tolerance for geopolitical and economic turmoil in Russia is at the highest level this year as stabilizing oil prices and a stronger ruble counteract the international standoff over the conflict in Ukraine.

Historical 100-day volatility in the Bloomberg gauge of U.S.-traded Russian stocks dropped to 25 percent Wednesday. That’s the lowest level since December, when policy makers raised the key interest rate 650 basis points to 17 percent at an emergency meeting to shore up the ruble amid a currency and oil rout.

Price swings have been narrowing as the ruble strengthened and oil, the country’s biggest export, stabilized above $60 per barrel after plunging to a six-year low in January. The economy, beset by international sanctions linked to the Ukraine conflict, may return to growth on a monthly basis in June, Russia’s Finance Ministry said this week.

“You don’t have that sense of panic that you had last year,” Nicholas Spiro, managing director of Spiro Sovereign Strategy, said by phone on Wednesday. “Oil prices are holding steady and there is no longer the degree of bloodletting in eastern Ukraine that there was several months ago. I have no doubt that investors are becoming somewhat used to the fact that Russia is going to be under a punitive sanctions regime for years to come.”

Ukraine Fighting

The U.S. and its allies have imposed financing restrictions, export bans and other measures to punish President Vladimir Putin, who they say is supporting rebels in Ukraine after annexing Crimea from the former Soviet republic last year. An upsurge in fighting is threatening a five-month old cease-fire. Officials in Kiev said yesterday that one soldier had been killed and 10 were wounded in a 24-hour period as government forces come under attack around Donetsk.

The ruble, the world’s worst-performing currency in 2014, has rallied 8.8 percent this year, the most in emerging markets. It weakened 1 percent on Wednesday.

The Bloomberg Russia-US Equity Index slumped 0.8 percent to 56.39. The gauge fell 5.5 percent in June, it’s steepest monthly drop this year. Its 14-day relative strength index was 31.8, approaching the level of 30 that some technical analyst see as a signal the market is poised to rise.

Government data on Wednesday showed a $5 billion upward revision of Russia’s current-account surplus in the first quarter, while the purchasing managers’ index for June rose to 48.7 versus an estimate of 48. Levels under 50 indicate a contraction.

‘Not Attractive’

The decline in volatility reflects low interest in Russian assets as investors don’t expect any changes in the country’s political and economic outlook any time soon, according to Vadim Bit-Avragim, a money manager at Kapital Asset Management LLC.

“Investors are just trying to avoid the market,” he said by phone from Moscow on Wednesday. “There is no economic growth, the situation is not attractive.”

Russia’s gross domestic product will shrink 3.5 percent this year in its first recession since 2009, according to the median estimate of 45 economists surveyed by Bloomberg. Brent crude, the oil grade traders use to price the country’s main export blend, has gained 33 percent from its January low. It’s still down 46 percent from its peak last June and sells for about three-fifths its five-year average price.

Brent for August delivery rose 0.2 percent to $62.14 as of 10:20 a.m. in Hong Kong on Thursday.

“Russian assets are not for the faint-hearted,” Spiro said.

‘Interesting Place’

While sanctions first imposed last summer had already been squeezing Russia’s $2 trillion economy, oil’s plunge into a bear market in November triggered a currency rout. The decline in crude and weakening currency pushed the dollar-denominated RTS Index down 45 percent last year, the deepest drop among 93 primary equity gauges tracked by Bloomberg.

The ruble-denominated Micex Index is valued at 6.5 times estimated earnings, the cheapest among emerging markets, data compiled by Bloomberg show.

“The ruble has stabilized, Russian stocks still remain relatively cheap and there are some lucrative dividend stories,” Kirill Yankovskiy, director of equity sales at Otkritie Capital Ltd. in London, said by phone on Monday. “The Russian market can be an interesting place from a return on investment point of view. Geopolitical tensions connected to Ukraine, a factor that weighed on investors for a number of months, is also fading away.”

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