Downed Russian Fighter Spurs U.S. Investor Reversal as ADRs Drop

  • ADRs decline to a one-week low as Gazprom, Sberbank retreat
  • RTS Index drops most in world after Turkish stock benchmark

A rebound in U.S.-traded Russian equities came to an abrupt halt as Turkey’s downing of one of the country’s warplanes stifled speculation that an alliance against terrorism could prompt its former Cold War foes to lift international sanctions.

The biggest exchange-traded fund tracking Russian stocks slumped 1.7 percent to $17.27 in New York on Tuesday. A Bloomberg gauge of American depositary receipts dropped 0.4 percent to a one-week low as companies from natural gas exporter Gazprom PJSC to lender Sberbank PJSC retreated. The dollar-denominated RTS Index tumbled 3.3 percent, the worst performance in the world after Turkey’s benchmark equity gauge.

Equities rallied last week and traders added money to the Market Vectors Russia ETF for the first time in five weeks as traders bet the U.S. and the European Union might ease sanctions as President Vladimir Putin’s foreign policy appeared to be aligning with theirs in the fight against Islamic State in Syria. Markets tumbled after Turkey, a member of NATO, shot down a Russian fighter jet that the nation said violated its air space.

“The geopolitical risk that investors thought was starting to decrease is now shooting up again,” Sergei Pigarev, senior analyst at Rye, Man & Gor Securities, said by phone from Moscow on Tuesday. “What’s going to happen in the Russia-West relations next is going to impact the market, and the market has no idea what is going to happen next.

Bombing Campaigns

The 28-nation North American Treaty Organization has scaled back ties with Russia over the Ukraine conflict as the U.S. and EU imposed international financing restrictions, export bans and other sanctions. Putin last week stepped up airstrikes against Islamic State targets in Syria after the militant group claimed credit for the downing of a Russian airliner. At the same time, a U.S.-led coalition increased its bombing following attacks in Paris that killed at least 130 people.

Turkey’s action was the first time in decades that a NATO member took down a Russian military aircraft and stoked concern that the Syrian civil war could be spiraling to a new level as foreign powers that have intervened come into direct conflict. U.S. President Barack Obama and his French counterpart Francois Hollande closed ranks Tuesday in demanding Syrian President Bashar al-Assad’s ouster, rebuffing Putin’s attempt to use the fight against Islamic State to keep its ally in power.

Gazprom, Sberbank

“The net economic effect on Turkey should be greater than on Russia, but given we have had a very proper rally on a decrease of political risk in Russia in the last weeks, temptation to take profit in Russia will be higher,” Kirill Yankovskiy, director of equity sales at Otkritie Capital International Ltd in London, said by e-mail on Tuesday. “The market is fearing escalation of the tension.”

Gazprom dropped the most in two weeks in New York as Raiffeisenbank ZAO cut the stock to hold from buy, saying the conflict in Turkey could have a negative impact on the company. About 14 percent of its total export sales in 2015 were made to Turkey, Raiffeisenbank’s Andrey Polischuk said in a report on Tuesday. Sberbank’s ADRs slumped 1.8 percent to $6.97.

The Bloomberg Russia-US Equity Index slipped to 52.18. Futures contracts on the RTS Index expiring in December added 0.8 percent to 87,400 in U.S. hours. United Co. Rusal slumped 4.6 percent to HK$2.69 as of 10:37 a.m. in Hong Kong on Wednesday, heading for its lowest close since March 2014.

“It’s clear that it’s geopolitical factors which are now the overriding determinant of sentiment,” Nicholas Spiro, managing director at Spiro Sovereign Strategy in London, said by e-mail. “We’ve seen a fairly significant rally in Russian assets, and now that’s been called into question.”

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