Putin Misses Global Rally as Micex Erases $28 Billion
President Vladimir Putin’s meddling in Ukraine cost Russia dearly in financial markets. With the downing of Malaysian Airlines Flight 17, the toll is only getting worse.
The price to protect Russian bonds against default, already the highest among the world’s four largest emerging markets, has surged since the July 17 tragedy in eastern Ukraine. The Micex Index resumed its decline, putting the losses since Putin began his push into Crimea in late February at 4.2 percent through yesterday and wiping out about $28 billion in market value, even as stock gauges from the U.S. to India jumped to all-time highs.
Russia’s market slump is exacerbating an economic slowdown, the opposite effect of the wealth generation from stock rallies that are helping underpin growth across the globe. Russian Deputy Economy Minister Andrey Klepach said this month the $2 trillion economy posted zero growth in the second quarter when compared with the first. That follows a 0.5 percent contraction in the January-to-March period.
“The market is sending a signal that Russia should avoid becoming an outcast and avoid shutting itself out of global markets,” Aleksei Belkin, who helps manage about $4 billion as chief investment officer at Kapital Asset Management LLC in Moscow, said by e-mail yesterday. Putin “believes that what he is doing is justified and he is very much aware that he is not facing a united opposition in Ukraine. But it’s getting costlier with every month.”
The Micex sank 6.1 percent in the three days through July 21, the biggest retreat since March, following a third round of U.S. sanctions against Putin’s government and the downing of MH17, which the U.S. and European Union say may have been carried out by pro-Russian rebels. All 298 passengers and crew aboard the plane were killed. The Micex rose 1.8 percent today by 3:03 p.m. in Moscow.
Russia canceled its first ruble bond auction in three months, citing “unfavorable market conditions,” the Finance Ministry said in a statement on its website today. The yield on Russia’s ruble debt due February 2027 fell nine basis points to 9.14 percent, trimming this month’s increase to 64 basis points.
Less than a week after approving the new measures designed to punish Putin for failing to end support for the Ukrainian separatists, the U.S. is pushing European governments for further penalties against Russia. Secretary of State John Kerry said July 20 circumstantial evidence suggests Russia provided the missile that rebels used to shoot down the passenger plane.
U.K. Prime Minister David Cameron yesterday raised the prospect of a EU-wide block on defense exports to Russia, as well as targeted sanctions against the “cronies and oligarchs” around Putin unless the country drops its support of the separatists
Putin has defied international leaders, saying that nobody should “use this tragedy to achieve selfish political aims.” He blamed the crash of the plane on the Ukraine conflict and said Russia will “do everything it can” to seek a negotiated settlement of the crisis.
“The big difference between the recent deterioration in sentiment towards Russia and the pressure on other EM assets is that in the case of Russia it is almost entirely driven by the actions of one man,” Nicholas Spiro, managing director of London-based Spiro Sovereign Strategy, said by e-mail. “While there’s no question that Russia’s economy is in a dire state right now, sentiment towards Russian assets is still strongly influenced by perceptions of what Mr. Putin will do.”
The cost of protecting Russian bonds against default for five years rose about 23 basis points to 207 basis points this month, the highest among the world’s largest emerging markets including Brazil, India and China, according to data compiled by Bloomberg. Russia had its credit rating cut to BBB-, the lowest investment grade ranking, in April by Standard & Poor’s.
Russian corporate debt sales overseas are down 67 percent this year just as cheap global borrowing costs spur record issuance worldwide, the data show.
In currency options, traders are the most bearish on Russia’s ruble among 23 developing-country currencies after Argentina’s peso. Investors are paying 2.9 percentage points more for the rights to sell the ruble over those to buy. That’s about twice the premium for the Polish zloty and Colombian peso, according to so-called three-month risk reversal data compiled by Bloomberg.
The 2.5 percent decline for Russia’s Micex equity gauge since the end of February compares with an 11 percent gain for emerging-market stocks globally and a 6.1 percent rally in the Standard & Poor’s 500 Index in the U.S.
Russia’s foreign reserves have slid $15 billion since the end of February to $478 billion in June as the central bank sold dollars to stem the losses in the ruble. Reserves have declined $67 billion, or 12 percent, since their peak in August 2011, according to central bank data.
Amid the market turmoil, the 19 richest Russians lost $17.4 billion since the start of the year. By comparison, the richest 64 Americans have seen their wealth go up $55 billion, according to the Bloomberg Billionaires Index.
Global investors withdrew $348 million from Russian bond and stock funds since the end of February, according to data compiled by EPFR Global.
Russian stocks have whipsawed asset managers this year. They plunged about 18 percent in the month through mid-March as Putin responded to the ouster of his ally, President Viktor Yanukovych, by sending troops into Crimea. He ultimately annexed the region after citizens voted in a disputed referendum to secede from Ukraine. Russian troops have begun massing anew on Ukraine’s border recently.
The tumble was followed by a 23 percent surge over a four-month period as tensions between Moscow and the U.S. and EU showed signs of easing.
Russia will weather these periods of short-term market volatility because of the country’s strong foreign-reserve and fiscal accounts, according to Jan Dehn, the head of research at Ashmore Group Plc, which manages about $70 billion in emerging-market assets.
“I don’t see any material reason to be overly concerned about the value of Russian assets for long-term investors,” Dehn said in a telephone interview yesterday. “Ultimately investors tend to focus quite closely on the underlying resilience that’s embedded in the Russian economy by virtue of its very high foreign-exchange reserves and very low levels of debt.”
Russia’s debt equaled just 13 percent of gross domestic product last year, compared with the global average of 79 percent, while the country’s foreign reserves were the fifth largest in the world, according to the International Monetary Fund.
The ruble has strengthened 2.5 percent since February as the central bank lifted its benchmark interest rate a total of 2 percentage points in March and April and intervened in the foreign-exchange market to meet demand for dollars.
The shooting down of the Malaysian jet has made additional sanctions against Russia more likely, according to Hayes Miller of Baring Asset Management.
“It’s going to be much easier for European countries to participate in sanctions,” Miller, who helps oversee $57 billion at Baring Asset Management, said by phone from Boston yesterday. “The power balance has shifted more against Russia at this point and I think it’s clear that there is the potential for Putin to isolate himself and to not consider the cost to some of the large companies.”
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