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World’s Best Stock Rally in Russia Fed by Putin Detente

June 25, 2014

Russian president Vladimir Putin

Vladimir Putin, Russia's president. Photographer: Andrey Rudakov/Bloomberg

Russian stocks are headed for the best performance among the world’s major equity markets for a second straight month as President Vladimir Putin pulls back from the confrontation in neighboring Ukraine.

The dollar-denominated RTS Index has rallied 9.7 percent to 1,421.07 in Moscow this month after adding 12 percent in May. The measure has gained 16 percent this quarter, making it the best performer among 93 equity gauges globally over that time after benchmarks in Argentina and Peru. The Bloomberg Index of the most-traded Russian shares in the U.S. has climbed 7.8 percent in June.

Putin asked lawmakers to revoke his authority to use force in Ukraine, in a conciliatory move that follows his meeting with the Ukrainian president on June 6. Investors dumped Russian assets, pushing the RTS index into a bear market on March 3, as the annexation of Crimea prompted the U.S. and European Union to impose sanctions on Russian businessmen and companies linked to Putin’s inner circle. The gauge entered a bull market on May 19 as Putin ordered a troop pullback at the Ukrainian border.

“The time is right to invest in Russia,” Luis Saenz, head of equity sales and trading at BCS Financial Group in London, said by phone yesterday. “The worst in the Ukraine crisis is over. Putin’s request for lawmakers to cancel the permission gives more confidence the de-escalation of the crisis is fully on its way. These are words, and actions will follow.”

Russian Rally

Putin made the call for a revocation to the upper house of parliament to help stabilize the situation in Ukraine after peace talks began, according to Dmitry Peskov, the president’s spokesman. Lawmakers authorized Putin on March 1 to use the military in Ukraine. The move is the strongest indication yet that tension in eastern Ukraine is abating.

Steps to de-escalate the four-month conflict have sparked a rally in Russian assets as the ruble strengthened 3.3 percent against the dollar this month, the best performance among emerging-market currencies. Gains were further fueled by oil prices, Russia’s main export, which rose amid turmoil in Iraq. Putin and Ukrainian President Petro Poroshenko held their first talks since the Ukrainian leader was elected in May, while the government in Kiev and pro-Russian separatists called cease-fires this week.

Still, Chancellor Angela Merkel told German lawmakers on June 23 that Russia faces so-called stage-three sanctions this week unless it works to bring about substantial progress in eastern Ukraine, according to two people present at the closed-door event. The U.S. and the EU have accused Putin of allowing weapons to flow to the separatists across the Ukrainian border and building up its military forces along the frontier again.

‘Substantial Difficulties’

“Based on Putin’s steps, it is clear that despite his rhetoric he does care about level-three sanctions that could potentially inflict substantial transactional difficulties for Russian banking system and its corporates,” Masha Gordon, who oversees more than $2.5 billion in assets as the London-based head of emerging-market equities at Pimco, wrote in an e-mail. “It is a positive for the market, as it restores some basis for future re-engagement.”

Pimco owns Russian stocks including the world’s biggest diamond producer OAO Alrosa, oil producer OAO Bashneft, gas producer OAO Novatek and mobile-phone carrier OAO MegaFon, Gordon said, adding that Pimco “continues to see value” in the holdings.

Target Lowered

Not everyone is betting on a sustained rally. VTB Capital yesterday reduced its year-end target for the RTS Index (RTSI$) to 1,400 from 1,600, indicating a decline of 1.5 percent from yesterday’s close. Futures on the RTS gauge dipped 0.9 percent to 135,960 in U.S. hours.

“We expect the balance of the year to be rangebound for the index as earnings expectations for domestic stocks are adjusted to reflect the drop in GDP growth,” Alexei Zabotkin, chief investment strategist at VTB Capital in Moscow, an investment arm of VTB Group, wrote in an e-mail.

With the RTS surging 34 percent since slumping to a four-year low in March, investors are “already discounting a return back to normality” Pimco’s Gordon said. BCS expects the RTS to rally to about 1,500 by year-end, implying a 5.6 percent gain, Saenz said.

Russia’s $2 trillion economy is facing stagnation this year as international sanctions linked to its standoff with Ukraine curb expansion. The central bank expects growth of 0.4 percent in 2014, the least since a recession in 2009.

While peace talks continued for a second day, pro-Russian rebels in Ukraine’s Donetsk region shot down a government helicopter in violation of a cease-fire, killing all nine troops on board.

‘Beyond Complicated’

“The situation in Ukraine is beyond complicated,” Yuri Selyandin, a money manager, who helps oversee about $2 billion at GHP Group in Moscow, said by phone yesterday. “The Ukraine crisis has been the major negative factor of influence for the Russian market.”

The Bloomberg Russia-US Equity Index climbed 1.5 percent to a five-month high of 94.52 yesterday. The Market Vectors Russia ETF (RSX:US), the biggest U.S. exchange-traded fund that holds Russian shares, rose 1.5 percent to $27.06. The RTS Volatility Index, which measures expected swings in futures, dropped 0.4 percent to 25.42, down from a five-year high of 74.46 on March 3.

Russia’s Micex Index (INDEXCF) retreated 1.1 percent to 1,502.33 at 7:45 a.m. in New York today. The RTS gauge slipped 1.5 percent to 1,399.37.

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

To contact the editors responsible for this story: Nikolaj Gammeltoft at Marie-France Han, Matthew Oakley

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