Analyst Who Called Russia’s 1998 Crash Says Stock Outlook Is ‘Grim’

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UBS's Dennis Says Russia Attractive Despite Sanctions

Veteran Russia strategist John-Paul Smith has a warning for anyone looking to buy the nation’s stocks on the cheap after this week’s selloff.

“Investors could become collateral damage from the actions of either side in the new cool war,” Smith, a former Deutsche Bank AG strategist and founder of research firm Ecstrat, said in a note published Friday. While he doesn’t rule out a short-term rebound in the ruble or the nation’s benchmark equity index after the market rout, the longer-term prognosis “remains grim.”

Russia’s dollar-denominated RTS Index suffered its biggest weekly plunge in more than two years after the harshest U.S. sanctions to date blocked trading of a handful of companies, including billionaire Oleg Deripaska’s metals giant United Co. Rusal. While some traders see the panic selling around the move as a buying opportunity, others are questioning whether all Russian assets are now vulnerable to penalties.

For Smith, investors have indeed “been far too complacent about the implications” of the standoff between Russia and the West, which he described as “a clash of political, economic and financial systems.”

A long-time bear on Russia, Smith won recognition for warning early in 1998 that investors were too optimistic on the country’s assets, saying it faced an unsustainable financial crisis that could trigger a devaluation. Months later, the country defaulted on $40 billion of domestic debt and the ruble went into freefall.

Investors are now waiting to see how Russia will retaliate against the U.S. penalties. Proposals currently under consideration include curbs on imports of American farm products and cooperation in nuclear energy and space launches, as well as a possible ban on titanium sales to Boeing Co. Another key risk is the escalation of the conflict in Syria, where the U.S. and Russia are also at loggerheads.

Washington’s sanctions “seem to be achieving their purpose by firing a so-far-metaphorical shot across the bows of the Kremlin,” Smith said. “The next move is left hanging in the air, but it is clear that almost any of the major listed companies could become targets for actions by the U.S., which would cause much broader complications.”

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