EU’s Muted Crimea Response Triggers Russian Stock Rebound

Russian stocks trading in New York snapped a four-week slide as the European Union, the nation’s biggest trading partner, refrained from imposing economic sanctions after the annexation of Crimea was completed.

The Bloomberg Russia-U.S. Equity index of the most-traded Russian shares in the U.S. rallied 2.2 percent to 80.27 last week, the most in more than a month. OAO Mechel (MTL), the country’s largest producer of coal for steelmakers, capped the biggest weekly surge since 2012, while OAO RusHydro (RSHYY) climbed 9 percent. RTS index futures declined in U.S. hours March 21.

While the EU will weigh curbs on business and investment, it said last week that President Vladimir Putin hasn’t crossed the destabilization threshold amid the worst standoff between Russia and the West since the Cold War. The 28-nation bloc is moving more slowly than the U.S. on sanctions, with President Barack Obama authorizing on March 20 potential future penalties on Russian industries from financial services to energy.

“The sanctions are still fairly cosmetic and won’t affect companies as well as the economy,” Mattias Westman, the chief executive officer of London-based Prosperity Capital Management Ltd., which manages about $3 billion in Russian and former Soviet country’s assets, said by phone March 21. “If you are a long-term investor, it’s a good time to buy.”

Russian equities have the cheapest valuations among 21 developing countries monitored by Bloomberg, with shares on the Micex Index trading at 4.8 times projected earnings, compared with a multiple of 9.1 for the MSCI Emerging Markets Index.

Gazprom, Sberbank

Westman said companies including Russian gas monopoly exporter OAO Gazprom (OGZD) and OAO Sberbank, the nation’s largest bank, are the most attractive. Both stocks are trading at more than half their historical valuations in Moscow, according to data compiled by Bloomberg.

Putin signed legislation last week completing the process to annex Ukraine’s Black Sea peninsula of Crimea, ignoring expanded sanctions. The EU added 12 Russian and Crimean names to its blacklist on March 21, bringing to 51 the number of Russian and Ukrainian politicians, officials and military commanders penalized by the European bloc. Businesspeople who face U.S. bans weren’t sanctioned by the EU.

European leaders also signaled Russia may face further repercussions if it doesn’t stop what they see as destabilizing actions in Ukraine. They vowed to wean the EU off oil and gas from Russia, echoing a pledge made in 2008 after Russia fought a five-day war with Georgia over a breakaway province.

‘Huge Blow’

In a March 18 speech to lawmakers, Putin blamed Western encroachment for forcing him to take control of Crimea and said Russia doesn’t plan to further split up Ukraine. Still, the massing of Russian troops near Ukraine’s borders has raised concerns that Putin may push further into the second most populous former Soviet republic.

“The crisis is far from being solved and Russian troops remain at the Ukrainian borders,” Ilya Kravets, the New York-based director of investment research at Daniloff Capital LLC, said by phone March 21. “The sanctions war isn’t over either. The U.S. has been very clear about potential measures targeting certain sectors of the economy, while the EU is also considering economic sanctions, which, if imposed, would be a huge blow for Russia. The uncertainty is still there.”

Last week’s advance trimmed this year’s slide in the Bloomberg Russia-U.S. gauge to 22 percent. American depositary receipts of Mechel (MTLR) surged 19 percent to $2.04 last week, trading at an 85 percent premium to their Moscow-listed shares. RusHydro, a Russian renewable energy producer, increased to $1.46 and capped the best week since May 2013.

The Market Vectors Russia ETF (RSX), the biggest U.S. exchange-traded fund that holds Russian shares, gained 2.3 percent to $22.31 last week. The RTS Volatility Index, which measures expected swings in futures, fell 1.4 percent to 47.67 in U.S. hours March 21, while RTS stock-index futures dropped 0.6 percent to 110,410.

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, Marie-France Han