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

Turbulent Transition Imperils Tunisia’s Arab Spring Gains

Critics say new anti-terrorism laws worsen Tunisia's situation while others put faith in country’s vibrant civil organizations, women’s movement More

Burundi’s Political Crisis May Become Humanitarian One

United Nations aid agencies issue warning as deadly violence sends tens of thousands fleeing More

Yemenis Adjust to Life Under Houthi Rule

Locals want warring parties to strike deal to stop bloodletting before deciding how country is governed 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.
Texas Town Residents Told to 'Just Leave' Ahead of Flood Threati
X
Greg Flakus
May 29, 2015 11:24 PM
Water from heavy rain in eastern and central Texas is now swelling rivers that flow into the Gulf of Mexico, threatening towns along their banks. VOA’s Greg Flakus visited the town of Wharton, southwest of Houston, where the Colorado River is close to cresting.
Video

Video Texas Town Residents Told to 'Just Leave' Ahead of Flood Threat

Water from heavy rain in eastern and central Texas is now swelling rivers that flow into the Gulf of Mexico, threatening towns along their banks. VOA’s Greg Flakus visited the town of Wharton, southwest of Houston, where the Colorado River is close to cresting.
Video

Video New York's One World Trade Center Observatory Opens to Public

From New Jersey to Long Island, from Northern suburbs to the Atlantic Ocean, with all of New York City in-between.  That view became available to the public Friday as the One World Trade Center Observatory opened in New York -- atop the replacement for the buildings destroyed in the September 11, 2001, attacks.  VOA’s Bernard Shusman reports.
Video

Video Seoul Sponsors Korean Unification Fair

With inter-Korean relations deteriorating over the North’s nuclear program, past military provocations and human rights abuses, many Koreans still hold out hope for eventual peaceful re-unification. VOA’s Brian Padden visited a “unification fair” held this week in Seoul, where border communities promoted the benefits of increased cooperation.
Video

Video Purple Door Coffeeshop: Changing Lives One Cup at a Time

For a quarter of his life, Kevin Persons lived on the street. Today, he is working behind the counter of an espresso bar, serving coffee and working to transition off the streets and into a home. Paul Vargas reports for VOA.
Video

Video Modular Robot Getting Closer to Reality

A robot being developed at Carnegie Mellon University has evolved into a multi-legged modular mechanical snake, able to move over rugged surfaces and explore the surroundings. Scientists say such machines could someday help in search and rescue operations. VOA’s George Putic reports.
Video

Video Shanghai Hosts Big Consumer Electronics Show

Electronic gadgets are a huge success in China, judging by the first Asian Consumer Electronics Show, held this week in Shanghai. Over the course of two days, more than 20,000 visitors watched, tested and played with useful and some less-useful electronic devices exhibited by about 200 manufacturers. VOA’s George Putic has more.
Video

Video Forced to Return Home, Afghan Refugees Face Increased Hardship

Undocumented refugees returning to Afghanistan from Pakistan have no jobs, no support system, and no home return to, and international aid agencies say they and the government are overwhelmed and under-resourced. Ayesha Tanzeem has more from Kabul.
Video

Video Britain Makes Controversial Move to Crack Down on Extremism

Britain is moving to tighten controls on extremist rhetoric, even when it does not incite violence or hatred -- a move that some are concerned might unduly restrict basic freedoms. It is an issue many countries are grappling with as extremist groups gain power in the Middle East, fueled in part by donations and fighters from the West. VOA’s Al Pessin reports from London.
Video

Video 3D Printer Makes Replica of Iconic Sports Car

Cars with parts made by 3D printers are already on the road, but engineers are still learning about this new technology. While testing the possibility of printing an entire car, researchers at the U.S. Department of Energy recently created an electric-powered replica of an iconic sports roadster. VOA’s George Putic has more.
Video

Video Al-Shabab Recruitment Drive Still on In Kenya

The al-Shabab militants that have long battled for control of Somalia also have recruited thousands of young people in Kenya, leaving many families disconsolate. Mohammed Yusuf recently visited the Kenyan town of Isiolo, and met with relatives of those recruited, as well as a many who have helped with the recruiting.
Video

Video A Small Oasis on Kabul's Outskirts Provides Relief From Security Tensions

When people in Kabul want to get away from the city and relax, many choose Qargha Lake, a small resort on the outskirts of Kabul. Ayesha Tanzeem visited and talked with people about the precious oasis.
Video

Video Kenyans Lament Losing Sons to al-Shabab

There is agony, fear and lost hope in the Kenyan town of Isiolo, a key target of a new al-Shabab recruitment drive. VOA's Mohammed Yusuf visits Isiolo to speak with families and at least one man who says he was a recruiter.
Video

Video Scientists Say Plankton More Important Than Previously Thought

Tiny ocean creatures called plankton are mostly thought of as food for whales and other large marine animals, but a four-year global study discovered, among other things, that plankton are a major source of oxygen on our planet. VOA’s George Putic reports.
Video

Video Kenya’s Capital Sees Rise in Shisha Parlors

In Kenya, the smoking of shisha, a type of flavored tobacco, is the latest craze. Patrons are flocking to shisha parlors to smoke and socialize. But the practice can be addictive and harmful, though many dabblers may not realize the dangers, according to a new review. Lenny Ruvaga has more on the story for VOA from Nairobi, Kenya.

VOA Blogs

World Currencies

EUR
USD
0.9115
JPY
USD
123.92
GBP
USD
0.6554
CAD
USD
1.2443
INR
USD
63.800

Rates may not be current.