News / Economy

Russian Power Play Risks Full-scale Investor Exodus

FILE-  A man passes by the office of the Moscow Exchange, Russia's main venue for trading in stocks, bonds, foreign exchange and derivatives.
FILE- A man passes by the office of the Moscow Exchange, Russia's main venue for trading in stocks, bonds, foreign exchange and derivatives.
Reuters
Russia's power play for Ukraine's Crimea region is putting to flight foreign stock and bond investors, who are rattled by the Kremlin's overruling of the country's economic interests in favor of its military ambitions.

Russia's half-trillion dollars in central bank reserves mean its creditworthiness is not in doubt, and political risk has always been part of the game while investing in Russia.

Yet the move on Crimea, which has earned Moscow global censure and the threat of Western sanctions, will deliver a blow to an already-faltering economy, with the U.S. Secretary of State threatening “very serious repercussions”.

And perhaps more crucially, it will further deepen investor mistrust of Russian institutions.

Gary Greenberg, head of emerging markets at Hermes Fund Managers, said a sell-off on Russian financial markets could spiral if uncertainty continues, especially in equities, where foreigners are estimated to hold 70 percent of the market.

“The market's assessment is that the Russian government is willing to sacrifice both the country's economy and its international standing in order to bolster its pretensions for a Eurasian union,” Greenberg said, referring to Moscow's desire for a customs union of ex-Soviet states.

“On the surface this looks like really bad news and it warns of the case for investing in Russia,” he said. “It also looks to me that the economy will worsen from here because of this, so some kind of sell-off is appropriate.”

Moscow stocks have endured the worst bloodbath so far, with a 12 percent plunge on Monday that has wiped almost $60 billion off the market's value.

The rouble has plunged to record lows, forcing the central bank to raise interest rates by 1.5 percentage points. Traders estimated it had sold $10 billion on foreign exchange markets.

Even Russian sovereign dollar bonds - the most heavily traded emerging debt instruments, according to industry body EMTA - have sold off, their average yield premium to U.S. Treasuries rising 2.6 percentage points on the day.

Losses will escalate if Western nations hit Moscow with economic sanctions. Kerry has named asset freezes, visa bans and trade isolation as possible measures.

Whatever the outcome of the crisis, Russia stands to lose the most, PIMCO fund manager Francesc Balcells said in a note.

Curbs on holding Russian financial assets for instance could make life hard for companies that rely on foreign money for debt and equity funding. Companies now face higher borrowing costs and delays on billions of dollars in loans as foreign banks become more wary of lending.

“Russian corporates are among the most active in international debt markets, and Russia has tried hard to open up its local currency debt market to foreign investors while making inroads in improving the investment climate,” Balcells said. “A confrontation with the West would erode many of these achievements, driving more foreign investors away.”

Bad timing

The moves are all the more damaging because of the timing.

First, Russia's economy is in trouble, with growth slowing to under 2 percent, inflation up and investment levels stagnant around 20 percent, well below necessary levels. The outlook for oil, accounting for half of budget revenues, is not optimistic.

Second, the past two years have seen investors overcome some of their Russia jitters and pile into rouble bonds, where they now own almost a quarter of the market. They had boosted holdings to 900 billion roubles ($25 billion) by end-2013, a nine-fold increase from early-2012, central bank data shows.

Despite emerging market ructions, they have held onto these positions, betting Russia's reserves will keep the rouble firm.  Instead, the rouble is one of the worst performing emerging currencies this year, losing 10 percent against the dollar.

That unexpected currency weakness could fuel an exodus from foreigners who had not bargained on the losses but the exit may have started even before the latest developments.

JPMorgan's monthly investor survey showed funds had swung into an underweight on rouble and local bonds in February, while dollar debt positions were also cut sharply.

“My guess is that markets will look for more risk premium in Russia,” said Sam Finkelstein, a bond fund manager at Goldman Sachs Asset Management who is neutral on Russia.

It may be harder to convince equity investors to stay. Over $2 billion has fled Russian equity funds this year, Morgan Stanley estimates, after 2013 outflows of $4.2 billion.

Russian stocks trade around 4.7 times their estimated 2015 earnings, the cheapest across emerging markets, partly because of corporate governance fears and lack of faith in local institutions. In comparison, shares in another troubled emerging market Turkey, trade at more than 7 times earnings.

Some funds such as JPMorgan reckon shares are cheap enough to take a punt on, but others such as Greenberg are happy to wait, fearing an economic recession and even full-fledged war. Yet others may just prefer to cut and run.

The Kremlin will have to work hard to lure investors back, says Christopher Granville, a long-term Russia watcher and managing director of consultancy Trusted Sources.

He draws parallels with the Yukos Affair of 2003 when Putin seized Russia's biggest oil company and jailed its owner Mikhail Khodorkovsky on charges of embezzlement, events that sparked a mass exodus of foreign investors.

“At that time Putin decided he had an agenda he was going to pursue regardless of the cost to the economy and investment climate and there were certainly high costs,” Granville said.

“This time he's decided there is a paramount interest in Ukraine and he is going to take it on the chin. If there is some damage control, Russian assets may bounce back. Alternatively, Putin has stepped over a rubicon and in the latter case Russia will be uninvestable in the near future.”

You May Like

In US, Still No Decision in Racially-charged Case

Missouri town, many Americans on edge over whether jurors will indict white police officer in August shooting death of unarmed black teen More

Corruption Fighters Want More From World’s Strongest Nations

Anti-corruption activists say final communique fell short of expectations and failed to fully address systemic problems More

Philippines Leery of Development on Reef Reclamation in S. China Sea

Chinese land reclamation projects in area have been ongoing for years, but new satellite imagery reportedly shows China’s massive construction project More

This forum has been closed.
Comments
     
There are no comments in this forum. Be first and add one

Featured Videos

Your JavaScript is turned off or you have an old version of Adobe's Flash Player. Get the latest Flash player.
Ukraine Marks Anniversary of Deadly 1930s Faminei
X
Daniel Schearf
November 23, 2014 4:32 PM
During a commemoration for millions who died of starvation in Ukraine in the early 1930s, President Petro Poroshenko lashed out at Soviet-era totalitarianism for causing the deaths and accused today’s Russian-backed rebels in the east of using similar tactics. VOA’s Daniel Shearf reports from Kyiv.
Video

Video Ukraine Marks Anniversary of Deadly 1930s Famine

During a commemoration for millions who died of starvation in Ukraine in the early 1930s, President Petro Poroshenko lashed out at Soviet-era totalitarianism for causing the deaths and accused today’s Russian-backed rebels in the east of using similar tactics. VOA’s Daniel Shearf reports from Kyiv.
Video

Video Hong Kong Protests at a Crossroads

New public opinion polls in Hong Kong indicate declining support for pro-democracy demonstrations after weeks of street protests. VOA’s Bill Ide in Guangzhou and Pros Laput in Hong Kong spoke with protesters and observers about whether demonstrators have been too aggressive in pushing for change.
Video

Video Law Enforcement, Activists in Ferguson Agree to Keep Peace

Authorities in Ferguson, Missouri, say they have agreed with protest leaders to maintain peace when a grand jury reaches its decision on whether to indict a white police officer in the shooting death of a black teenager. Ferguson, a suburb of St. Louis, has been the scene of intermittent violence since the August 9 shooting intensified long-simmering antagonism between the police and the African-American community. VOA's Zlatica Hoke reports.
Video

Video US Immigration Relief Imminent for Mixed-Status Families

Tens of thousands of undocumented immigrants in the Washington, D.C., area may benefit from a controversial presidential order announced this week. It's not a path to citizenship, as some activists hoped. But it will allow more immigrants who arrived as children or who have citizen children, to avoid deportation and work legally. VOA's Victoria Macchi talks with one young man who benefited from an earlier presidential order, and whose parents may now benefit after years of living in fear.
Video

Video New Skateboard Defies Gravity

A futuristic dream only a couple of decades ago, the hoverboard – a skateboard that floats above the ground - has finally been made possible. While still not ready for mass production, it promises to become a cool mode of transport... at least over some surfaces. VOA’s George Putic reports.
Video

Video Falling Gas Prices Impact US Oil Extraction

With the price of oil now less than $80 a barrel, motorists throughout the United States are benefiting from gas prices below $3 a gallon. But as VOA’s Kane Farabaugh reports, the decreasing price of petroleum has a downside for the hydraulic fracturing industry in the United States.
Video

Video Tensions Build on Korean Peninsula Amid Military Drills

It has been another tense week on the Korean peninsula as Pyongyang threatened to again test nuclear weapons while the U.S. and South Korean forces held joint military exercises in a show of force. VOA’s Brian Padden reports from the Kunsan Air Base in South Korea.
Video

Video Mama Sarah Obama Honored at UN Women’s Entrepreneurship Day

President Barack Obama's step-grandmother is in the United States to raise money to build a $12 million school and hospital center in Kogelo, Kenya, the birthplace of the president's father, Barack Obama, Sr. She was honored for her decades of work to aid poor Kenyans at a Women's Entrepreneurship Day at the United Nations.
Video

Video Gay Evangelicals Argue That Bible Does Not Condemn Homosexuality

More than 30 U.S. states now recognize same-sex marriages, and an increasing number of mainline American churches are blessing them. But evangelical church members- which account for around 30 percent of the U.S. adult population - believe the Bible unequivocally condemns homosexuality. VOA's Jerome Socolovsky reports that gay, lesbian, bisexual and transgender evangelicals are coming out. Backed by a prominent evangelical scholar, they argue that the traditional reading of the bible is wrong.
Video

Video Ebola Economic Toll Stirs W. Africa Food Security Concerns

The World Bank said Wednesday that it expects the economic impact of the Ebola outbreak on the sub-Saharan economy to cost somewhere betweenf $3 billion to $4 billion - well below a previously-outlined worst-case scenario of $32 billion. Some economists, however, paint a gloomier picture - warning that the disruption to regional markets and trading is considerable. Henry Ridgwell reports from London.
Video

Video Chaos, Abuse Defy Solution in Libya

The political and security crisis in Libya is deepening, with competing governments and, according to Amnesty International, widespread human rights violations committed with impunity. VOA’s Al Pessin reports from London.
Video

Video US Hosts Record 866,000 Foreign Students

Close to 900,000 international students are studying at American universities and colleges, more than ever before. About half of them come from Asia, mostly China. The United States hosts more foreign students than any other country in the world, and its foreign student population is steadily growing. Zlatica Hoke reports.

All About America

AppleAndroid

World Currencies

EUR
USD
0.8050
JPY
USD
117.90
GBP
USD
0.6376
CAD
USD
1.1259
INR
USD
61.655

Rates may not be current.