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Russian Hedging Costs Soar as Obama Fight Spurs Swings

November 08, 2012

Options traders are demanding more protection against swings in Russian stocks over the next six months after U.S. President Barack Obama’s re-election sent oil tumbling and heightened concern developed nations’ efforts to shore up economies will reduce demand for riskier assets.

Implied volatility, the key gauge of options prices, for at-the-money contracts on the Market Vectors Russia exchange- traded fund (RSX:US) due in six months rose to 29.94 yesterday, and was 26 percent above the level for those expiring in 30 days on Nov. 2, the biggest gap since December 2010, data compiled by Bloomberg show. The Bloomberg Russia-US Equity Index (RUS14BN) of the most-traded Russian companies in the U.S. dropped the most since July yesterday, while futures on Moscow’s RTS Index sank 1 percent to 140,490 in the U.S.

Oil, Russia’s biggest export earner, slumped the most this year in New York as Obama was re-elected U.S. president and Greece prepared to vote on austerity measures. Obama’s victory sets the stage for a showdown with Congress over $600 billion in tax increases and spending cuts set to come into force from January. The euro region, ravaged by the three-year-old debt crisis, may also be forced to take further action with the European Commission predicting near-stagnation next year.

“We are about to run into a period of political frenzy in relation to economic management and that is going to lead to more volatility,” Chris Weafer, chief strategist at Sberbank Investment Research, a unit of Russia’s biggest lender, said in an interview at Bloomberg’s headquarters in New York yesterday. “There will be a lot of uncertainty and a lot of volatility in markets, particularly high-beta markets, among which Russia is nearly at the top of the list,” he said, referring to a measure of risk.

‘Preoccupies Investors’

The Market Vectors Russia ETF (RSX:US), the largest dedicated Russian exchange-traded fund, fell 2.9 percent to $27.56 in the U.S. yesterday, the lowest level since Sept. 5. The RTS Volatility Index, which measures expected swings in the stock futures, surged 13 percent to 30 points. The Bloomberg Russia-US Index lost 2.5 percent to 92.75.

Republican John Boehner, Speaker of the U.S. House of Representatives, said yesterday that his party would be willing to hold discussions on ways to avert the so-called fiscal cliff of combined tax increases and expenditure reductions from 2013. Obama has called for higher tax rates for people earning more than $200,000 a year and married couples making more than $250,000, while the Republicans oppose raising income tax rates.

“The specific decisions on spending, tax and debt management in the U.S. over the winter is what preoccupies investors,” Weafer said. “That will be reflected in the way we see emerging markets and risk assets trading. I expect volatility will greatly increase.”

Micex Swings

Russia’s benchmark Micex Index (INDEXCF)’s 30-day volatility coefficient fell to 14.38 by 4:48 p.m. in Moscow today, the lowest level since Sept. 13. A similar measure for the MSCI Emerging Market Index of developing-nation stocks rose to 8.53, climbing from a six-year low reached yesterday.

The European Commission said yesterday that the euro-area economy will expand 0.1 percent in 2013, down from a May forecast of 1 percent. The European Union’s executive body cut the forecast for Germany, the region’s largest economy, to 0.8 percent from 1.7 percent.

American depositary receipts of Moscow-based OAO Gazprom (OGZPY:US), the world’s largest natural gas producer, lost 2.6 percent to $9.04 in New York yesterday, reaching the lowest level since Aug. 2.

Surging Volumes

Volumes rose to more than six times the daily average over the past three months, and 10-day volatility on the ADRs held at 34.3, the highest reading since Sept. 26, data compiled by Bloomberg show. Futures on Gazprom’s Micex-listed stock dropped 0.7 percent.

State-run Gazprom, Russia’s biggest company, links its gas contracts to oil prices and refined products with a time lag, a method that dates back to the 1970s, when the fuels were more commonly used in power generation.

“Gazprom’s contract prices in Europe are linked to the price of oil, so their profitability will suffer as a result or lower pricing and lower demand and as the European economy is struggling to recover,” Ilya Kravets, who helps manage $100 million of investments at Daniloff Capital LLC in New York, said by e-mail yesterday.

Crude oil for December delivery tumbled percent to $84.44 a barrel on the New York Mercantile Exchange yesterday, the biggest decline since Dec. 14. The contracts rebounded today, adding 1.2 percent to $85.49, paring this year’s drop to 13 percent.

Brent Rebounds

Brent oil for December settlement sank 3.8 percent to $106.82 a barrel on the ICE Futures Europe exchange yesterday, before jumping 0.9 percent to $107.80 today. Urals crude, Russia’s chief export blend, decreased 3.7 percent to $105.77 yesterday, the most since June 21. It’s up 0.6 percent today to $106.41.

The S&P’s GSCI Spot Index of 24 commodities retreated 2.4 percent yesterday, the biggest one-day slide since July 23. The gauge rose 0.7 percent today.

The dollar climbed 0.3 percent against the euro yesterday and another 0.2 percent today. A stronger U.S. currency reduces the appeal of dollar-denominated raw materials as an investment.

Futures contracts on Russia’s ruble weakened 0.2 percent to 31.75 per dollar today, as the currency slipped the same amount to 31.54 in Moscow.

CTC Media Inc. (CTCM:US), the Russian media company that owns the CTC television channel, declined 3.5 percent to $8.46 on the Nasdaq Stock Exchange yesterday, the lowest level since Oct. 31. Trading volume was 31 percent above the three-month daily average, data compiled by Bloomberg show.

CTC Media reported a net loss of $38.5 million in the third quarter, even as revenue increased 1.5 percent to $162 million, according to a statement on its website yesterday. The Moscow- based company also declared a 13 cent per-share cash dividend to be paid around Dec. 28.

To contact the reporter on this story: Halia Pavliva in New York at

To contact the editor responsible for this story: Emma O’Brien at

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