Bloomberg News

Goldman’s Kremlin Work Undercut as Russian Stocks Decline

March 14, 2014

An Employee Works in OAO Mechel's Metallurgical Plant

OAO Mechel fell 5.1 percent to a record-low of $1.66. Photographer: Andrey Rudakov/Bloomberg

Russia’s incursion into Crimea has made Goldman Sachs Group Inc. (G:US)’s job of improving the country’s image with overseas investors tricky. The bank’s own analysts reduced their growth forecast for Russia yesterday, saying the crisis will prompt companies to delay investment.

Goldman Sachs’ economists lowered their 2014 estimate to 1 percent from 3 percent, joining Citigroup Inc. and Bank of America Corp. in ratcheting down projections. The move helped add to a selloff in Russian stocks that began when President Vladimir Putin ordered soldiers to take control of Ukraine’s Crimea peninsula two weeks ago. The Bloomberg index of most-traded Russian stocks in the U.S. fell 3 percent yesterday, extending this month’s loss to 13 percent.

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A year after Goldman Sachs bankers signed a three-year contract to help Russia attract foreign capital, investors are fleeing the country’s financial markets. The ruble has tumbled 10 percent to a record low while bonds yields climbed 105 basis points. Goldman Sachs’ economists said yesterday that while the “direct impact” of the Ukrainian crisis on Russia’s economy will likely be limited, the standoff will choke off growth by eroding business executives’ confidence.

“These events will slow economic growth in Russia,” Walter “Bucky” Hellwig, who helps manage $17 billion at BB&T Wealth Management in Birmingham, Alabama, said by phone yesterday. “The market is driven by fear of further escalation of the conflict and fear of whatever sanctions” the U.S. and Europe will impose on Russia, he said.

Chinese Wall

The nation’s benchmark Micex Index dropped 2.1 percent to 1,222.20 by 6:04 p.m. in Moscow. OAO Mechel, the country’s biggest producer of coking coal, fell 5.1 percent to a record-low of $1.66. Yandex NV, Russia’s biggest Internet company, plunged 8.4 percent to $29.16, the lowest level since July. The Market Vectors Russia ETF (RSX:US) slumped 4.4 percent to $21.05, the lowest since July 2009. RTS stock-index futures slipped 2.6 percent to 104,350 in U.S. hours yesterday.

Tom Blackwell, a spokesman for Goldman Sachs in Moscow, declined to comment when contacted by phone yesterday.

“On the one hand, they are promoting Russia, on the other hand they downgrade the growth forecast, but there is a Chinese wall between different parts of an investment bank such as Goldman,” Timothy Ghriskey, chief investment officer at Solaris Asset Management LLC in New York, which manages about $1.5 billion in assets, said by phone yesterday. “Different parts of the same firm have different opinions, which benefits investors because they want an unbiased opinion.”

Bearish Options

About 72,000 puts to sell the Market Vectors Russia ETF changed hands yesterday, almost five times the four-week average, compared with 35,450 calls to sell. Ownership of bearish options on the fund has doubled to more than 233,000 contracts in the past month, while open interest for bullish contracts reached 143,000, according to data compiled by Bloomberg.

Capital outflows from Russia have increased 60 percent to $45 billion from the first quarter of last year, Goldman Sachs’s economists, led by Clemens Grafe and Andrew Matheny, wrote in the report. The Russian financial sector’s gross exposure to Ukraine is “significant” at about $30 billion, they said.

The $2 trillion economy grew at less than half the previous year’s pace in 2013, the least since a 2009 recession. Bank of America cut its 2014 GDP growth estimate to 1.4 percent from 1.7 percent this month and Citigroup reduced its forecast to 1 percent from 2.6 percent.

Goldman Sachs has signed an agreement with the Economy Ministry and the Russian Direct Investment Fund to advise on issues such as communicating government decisions and setting up meetings with investors, Sergei Arsenyev, Goldman Sachs’s managing director of investment banking in Moscow, said in February 2013.

‘Interesting Opportunities’

“We think valuations in Russia remain very attractive, and there are many interesting opportunities for investors on the public and private side,” Arsenyev said last year.

The nation’s benchmark Micex Index has plunged 20 percent in 2014 and is the cheapest among 21 developing countries monitored by Bloomberg, trading at 4.3 times estimated earnings. That’s about a third of the 13.8-multiple of India’s S&P BSE Sensex Index. (SENSEX) Brazil’s Ibovespa trades at 8.9 times projected profit and China’s Shanghai Composite Index (SHCOMP) is valued at 7.6 times.

‘Very Serious’

The U.S. and Germany stepped up pressure on Russia to back down from plans to annex Crimea from Ukraine after the region holds a referendum, warning they’ll exact an economic toll if Russia doesn’t.

U.S. Secretary of State John Kerry told a Senate panel in Washington yesterday that the U.S. and Europe will take “very serious” steps the day after the vote “if there is no sign” of a resolution to the crisis. German Chancellor Angela Merkel said the Kremlin is risking “massive” political and economic damage.

“Investors are selling like crazy,” Boris Vilidnitsky, an analyst at Barclays Plc, said by phone from Connecticut yesterday. “Political risk, together with slower economic growth forecasts and fear of sanctions against Russia, outweigh everything else.”

United Co. Rusal, a Moscow-based aluminum producer, fell 2.5 percent to HK$2.30 in Hong Kong trading. The MSCI Asia Pacific Index slumped 1.9 percent.

To contact the reporter on this story: Halia Pavliva in New York at hpavliva@bloomberg.net

To contact the editors responsible for this story: Tal Barak Harif at tbarak@bloomberg.net Rita Nazareth, Alex Nicholson


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Companies Mentioned

  • G
    (Genpact Ltd)
    • $17.3 USD
    • 0.01
    • 0.06%
  • RSX
    (Market Vectors Russia ETF)
    • $23.55 USD
    • -0.12
    • -0.51%
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