Record Russia ETF Inflows Dry Up as ADR Slump Deepens

Apr 17, 2014 6:47 am ET

(Corrects to say “premium” in seventh paragraph of story published April 16.)

April 16 (Bloomberg) -- Russian stocks trading in New York sank for a fourth day as concern mounted that President Vladimir Putin faces stiffer international sanctions after his special forces were spotted in eastern Ukraine.

The Bloomberg index of Russian shares listed in the U.S. retreated 2.5 percent to a one-month low of 78.98 as 13 out of 14 stocks fell. OAO Mobile TeleSystems, Russia’s biggest mobile phone company, plunged 5.3 percent to the lowest level since January 2012. The escalation of the conflict halted a record inflow of money into the Market Vectors Russia exchange-traded fund, which lost 2.7 percent yesterday.

Ukraine unleashed an offensive to dislodge militants after fighting between its forces and pro-Russian separatists turned deadly this week. Russia’s 45th Airborne Regiment was identified in the eastern Ukrainian towns of Slovyansk and Kramatorsk, First Deputy Prime Minister Vitali Yarema said in televised comments yesterday. The region’s uncertainty may hurt economic growth in Russia, the country’s finance minister said.

“This is a dangerous moment,” Ian Hague, founding partner of New York-based Firebird Management LLC, which manages $1.3 billion of assets including Russian stocks, said in an interview yesterday. “Economic sanctions would close off western capital markets for Russia. More sanctions will for sure result in economic recession.”

No Growth

Russia’s gross domestic product may expand less than 0.5 percent or may not grow at all this year as capital flight accelerates in the wake of its annexation of Crimea last month, Finance Minister Anton Siluanov said in Moscow yesterday. Capital outflows rose to $50.6 billion in the first three months of the year from $27.5 billion a year earlier, according to the central bank.

The Market Vectors Russia ETF saw no new inflows in the four trading days through April 14 after a record $574 million was deposited into the fund in March, according to data compiled by Bloomberg. The shares are down 23 percent this year. The Micex rose 0.3 percent to 1,314.74 by 10:07 a.m. in Moscow today.

Mobile TeleSystems fell 5.3 percent to $15.42 in New York and traded at a 16 percent premium to the company’s Moscow- listed shares.

Yandex NV, the nation’s biggest Internet company, lost 0.5 percent to $27.38, the lowest level since June. The stock has declined 37 percent in 2014. OAO Sberbank, Russia’s biggest lender, tumbled 3.6 percent to $8.43.

The U.S. and European Union are deliberating deeper sanctions against Russia for stoking unrest in eastern Ukraine. The Obama administration has left the door open to providing military assistance to the Ukrainian government while ruling out providing arms or other “lethal” aid at this time.

Bear Market

There is “substantial evidence” suggesting direct Russian involvement in eastern Ukraine, White House press secretary Jay Carney said at a press briefing in Washington DC yesterday. The U.S. also is evaluating the possibility of new sanctions to increase pressure on Putin, he said, without elaborating.

The Micex index entered a bear market on March 13, before a referendum in which people in the Crimea peninsula voted to break away from Ukraine. The U.S. imposed financial sanctions on Russian officials, including billionaires close to Putin, the following week. European Union leaders agreed on March 17 to impose sanctions on 21 individuals and the region’s foreign ministers agreed April 14 in Luxembourg to add new names to the list.

“If sanctions aren’t too bad, the market is overly depressed,” Gary Greenberg, who oversees about $785 million in emerging-market stocks at Hermes Fund Managers Ltd., said in an April 15 phone interview from London. “We did a little buying today and bought Mail.ru. There is certainly value there. Russia has no real interest in a hot war.”

Cheap Valuation

Mail.ru Group Ltd. is valued at 16 times estimated earnings, half the multiple of Tencent Holdings Ltd., China’s largest Internet company by market value, data compiled by Bloomberg show. Greenberg said the comparison between the two shows how cheap Mail.ru is.

Mail.ru, controlled by Russian billionaire Alisher Usmanov, fell 0.7 percent to $29.40 in London yesterday, the lowest level since July.

The RTS Volatility Index, which measures expected swings in futures, decreased 2.2 percent to 41.33 in U.S. hours. RTS stock-index futures expiring in June fell 0.7 percent to 110,250. The Bloomberg Russia-US Equity Index has tumbled 23 percent this year, compared with a 13 percent slide for the Micex gauge in Moscow.