ETF Rises as EU Sanctions Seen to Be Moderate: Russia Overnight

Jul 24, 2014 10:44 pm ET

July 25 (Bloomberg) -- An exchange-traded fund of Russian stocks gained in New York as the European Union’s proposed sanctions to punish the country for its support of separatists in Ukraine weren’t as deep as some investors had expected.

The Market Vectors Russia ETF, the largest U.S. dedicated ETF tracking the nation’s companies, increased 0.4 percent to $25.03 in New York yesterday. American depositary receipts of OAO Mechel advanced 3 percent while OAO GMK Norilsk Nickel gained 1.5 percent. The Bloomberg Russia-US Equity Index slipped 0.1 percent to 86.58, reversing an earlier gain of as much as 0.4 percent.

The ETF advanced as a draft document obtained by Bloomberg showed the EU is preparing to sanction top Russian security officials and didn’t mention targeting any major companies. The 28-member bloc is also considering a ban on European purchases of bonds or shares sold by Russia’s state-owned banks among the options for stepped-up measures against the Kremlin, according to a proposal presented to member states.

“Investors are relieved,” Ilya Kravets, the New York- based director of investment research at Daniloff Capital LLC, said by phone. “The market expected much tougher sanctions, and that hasn’t materialized so far.”

The U.S. and EU have sought to isolate President Vladimir Putin for supporting separatists in eastern Ukraine. Last week’s downing of Malaysian Air flight MH17, which according to the U.S. was probably destroyed by a Russian-made missile system, has galvanized international sentiment against him. The rebels deny they shot down the jet. The crash killed all 298 people aboard.

‘Cautious’ Sentiment

“A resolution of the situation is required for a more sustainable recovery for Russia, and the risk, of course, is not only a prolonged standoff but also harsher sanctions,” Jose Morales, who oversees $2.5 billion in global equities at Mirae Asset Global Investment in New York, wrote in an e-mail yesterday. “We remain positive on Russian privately owned companies and consumption-related stories.”

The U.S. and E.U. imposed measures including travel bans and asset freezes on Putin allies following Russia’s annexation of the Black Sea peninsula of Crimea in March. The U.S. also has blocked OAO Rosneft, OAO Novatek, OAO Gazprombank and Vnesheconombank from accessing American equity or debt markets for new financing with maturities longer than 90 days.

“The sentiment remains cautious toward Russian equities,” Morales said. “New sanctions are still a possibility given the ongoing standoff. This will continue to put pressure on Russian equities in the near term and will also have a negative impact on economic growth.”

The Bloomberg gauge of the most-traded Russian equities in the U.S. has fallen 15 percent this year.

‘Completely Unexpected’

RTS stock-index futures declined 0.3 percent to 124,920 in U.S. hours yesterday, reversing earlier gains as Ukrainian President Petro Poroshenko called for a confidence vote to be held today after Prime Minister Arseniy Yatsenyuk submitted his resignation. The RTS Volatility Index, a measure of expected swings in the futures, rose 1.6 percent to 34.17. United Co. Rusal fell 0.5 percent to HK$3.81 at 10:38 a.m. in Hong Kong trading, heading for a second day of losses.

Yatsenyuk’s resignation “was completely unexpected and is a sign of more instability” in the region, Luis Saenz, London- based head of equity sales of BCS Financial Corp., said by phone yesterday.

“It’s a brand-new government and it was expected to work for a much longer time than just a few months, as the country has already gone through dramatic changes,” Saenz said.

Yatsenyuk was appointed as prime minister in February. Poroshenko was elected president in May.