Russia ETF Bears Retreat as Putin Aligns With U.S. on Terrorism

  • Short interest in Market Vectors Russia ETF at two-month low
  • RTS Index rallies most in the world as ADRs advance in U.S.

The biggest exchange-traded fund tracking Russian stocks rallied as short interest dropped to the lowest level in two months amid speculation last week’s attacks in Paris are spurring a joint effort to fight terrorism that could help mend relations with the U.S. and Europe.

The Market Vectors Russia ETF gained 1.7 percent to $17.01 in New York, pushing the two-day advance to 5.7 percent. Short interest in the fund dropped to 5.1 percent of shares outstanding, the lowest since September, after peaking at this year’s high of 13.1 percent last month, according to data compiled by Bloomberg and Markit. The dollar-denominated RTS Index rose the most among 93 primary equity indexes.

Investor sentiment is shifting after French president Francois Hollande called for Russia and the U.S. to set aside their differences and work together against Islamic State. President Vladimir Putin has seen Russia’s economy fall into its first recession since 2009 as the country’s former Cold War foes imposed international financing restrictions and other sanctions to punish him for supporting a rebellion in Ukraine. Traders are pulling back bearish bets as the prospects for an alliance in the fight against radical Islamic terrorism that could ultimately lead to an easing of those measures.

“There are hopes that Russia’s role in fighting terrorism could help alleviate international sanctions,” Vladimir Vedeneev, chief investment officer at Raiffeisen Asset Management in Moscow, said by phone on Tuesday. “It remains to be seen if the bullish sentiment in the market is long-lived.”

Military Strikes

Putin, in orders broadcast on state television Tuesday, told Russian naval forces to work as allies with French warships in the Mediterranean to attack Islamic State targets in Syria. The French are there as part of a U.S.-led coalition. Russia’s military doubled its attacks in Syria, carrying out 34 cruise missile strikes, Defense Minister Sergei Shoigu said.

Sanctions and a decline in oil prices from around $115 a barrel in June 2014 have battered Russia’s economy and spurred capital flight from the world’s largest energy exporter. Investors pulled $16.4 million from Market Vectors Russia ETF on Monday, the biggest one-day withdrawal since August. The European Union’s trade and investment restrictions on Russia aimed at keeping up the pressure on the Kremlin to bring peace to eastern Ukraine expire at the end of January.

The Bloomberg Russia-US Equity Index gained 1.7 percent to 51.18. The RTS Index jumped 4.6 percent to 862.44. Future contracts on the RTS Index expiring in December slid 0.2 percent to 86,630 in U.S. hours.

United Co. Rusal tumbled 4.2 percent to HK$2.71 at 10:56 a.m. in Hong Kong, heading for the lowest close since March 31, 2014. The stock has slumped 48 percent this year as metal prices slide.

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