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

French Refugee Drama Wins Cannes Top Prize

Dheepan is about a group of Sri Lankan refugees who pretend to be a family in order to flee their war-torn country for a housing project in France More

Photogallery Crisis in Macedonia Requires Meaningful and Swift Measures

The international community has called on Macedonian leadership to take concrete measures in support of democracy in order to exit the crisis More

Activists: IS Executes 217 Civilians, Soldiers Near Palmyra

British-based Syrian Observatory for Human Rights on Sunday said the victims include nurses, women, children and Syrian government fighters 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.
Turkey's Main Opposition Party Hopes for Election Breakthroughi
X
May 22, 2015 10:23 AM
Turkey’s main opposition Republican People’s Party has sought an image change ahead of the June 7 general election. The move comes after suffering successive defeats at the hands of the Islamist-rooted AK Party, which has portrayed it as hostile to religion. Dorian Jones reports from the western city of Izmir.
Video

Video Turkey's Main Opposition Party Hopes for Election Breakthrough

Turkey’s main opposition Republican People’s Party has sought an image change ahead of the June 7 general election. The move comes after suffering successive defeats at the hands of the Islamist-rooted AK Party, which has portrayed it as hostile to religion. Dorian Jones reports from the western city of Izmir.
Video

Video Europe Follows US Lead in Tackling ‘Conflict Minerals’

Metals mined from conflict zones in places like the Democratic Republic of Congo are often sold by warlords to buy weapons. This week European lawmakers voted to force manufacturers to prove that their supply chains are not inadvertently fueling conflicts and human rights abuses. Henry Ridgwell reports from London.
Video

Video Class Tackles Questions of Race, Discrimination

Unrest in some U.S. cities is more than just a trending news item at Ladue Middle School in St. Louis, Missouri. As VOA’s Kane Farabaugh reports, it’s a focus of a multicultural studies class engaging students in wide-ranging discussions about racial tensions and police aggression.
Video

Video Mind-Controlled Prosthetics Are Getting Closer

Scientists and engineers are making substantial advances towards the ultimate goal in prosthetics – creation of limbs that can be controlled by the wearer’s mind. Thanks to sophisticated sensors capable of picking up the brain’s signals, an amputee in Iceland is literally bringing us one step closer to that goal. VOA’s George Putic reports.
Video

Video Afghan Economy Sinks As Foreign Troops Depart

As international troops prepare to leave Afghanistan, and many foreign aid groups follow, Afghans are grappling with how the exodus will affect the country's fragile economy. Ayesha Tanzeem reports from the Afghan capital, Kabul.
Video

Video Poverty, Ignorance Force Underage Girls Into Marriage

The recent marriage of a 17-year old Chechen girl to a local police chief who was 30 years older and already had a wife caused an outcry in Russia and beyond. The bride was reportedly forced to marry and her parents were intimidated into giving their consent. The union spotlighted yet again the plight of many underage girls in developing countries. Zlatica Hoke reports poverty, ignorance and fear are behind the practice, especially in Asia and Africa.
Video

Video South Korea Marks Gwangju Uprising Anniversary

South Korea this week marked the 35th anniversary of a protest that turned deadly. The Gwangju Uprising is credited with starting the country’s democratic revolution after it was violently quelled by South Korea’s former military rulers. But as Jason Strother reports, some observers worry that democracy has recently been eroded.
Video

Video California’s Water System Not Created To Handle Current Drought

The drought in California is moving into its fourth year. While the state's governor is mandating a reduction in urban water use, most of the water used in California is for agriculture. But both city dwellers and farmers are feeling the impact of the drought. Some experts say the state’s water system was not created to handle long periods of drought. Elizabeth Lee reports from Ventura County, an agricultural region just northwest of Los Angeles.
Video

Video How to Clone a Mammoth: The Science of De-Extinction

An international team of scientists has sequenced the complete genome of the woolly mammoth. Led by the Swedish Museum of Natural History in Stockholm, the work opens the door to recreate the huge herbivore, which last roamed the Earth 4,000 years ago. VOA’s Rosanne Skirble considers the science of de-extinction and its place on the planet
Video

Video Blind Boy Defines His Life with Music

Cole Moran was born blind. He also has cognitive delays and other birth defects. He has to learn everything by ear. Nevertheless, the 12-year-old has had an insatiable love for music since he was born. VOA’s June Soh introduces us to the young phenomenal harmonica player.

VOA Blogs

World Currencies

EUR
USD
0.8957
JPY
USD
120.93
GBP
USD
0.6393
CAD
USD
1.2199
INR
USD
63.470

Rates may not be current.