Ukraine Left Behind as Russian Stock Gains Are Unmatched

Diverse Paper Currency, Coins, Line Graph

(Bloomberg – – Elena Popina – February 26, 2015)

Russia is emerging as the world’s best stock market after putting in the worst performance last year. For neighboring Ukraine, the second-biggest loser in 2014, there’s no sign of such a turnaround yet.

Russia’s dollar-denominated RTS Index has soared 15 percent in 2015, while the Ukrainian Equities Index is last in dollar terms among 93 markets tracked by Bloomberg after tumbling 49 percent. The divergence contrasts with 2014, when the two benchmarks sank to the bottom together, losing more than 40 percent amid an investor exodus following President Vladimir Putin’s annexation of Crimea one year ago.

Investors are returning to Russian assets as the price of oil stabilizes and a cease-fire takes hold in eastern Ukraine, reducing the risk of new international sanctions over Putin’s role in the conflict. In Kiev, meanwhile, the government is trying to prevent an economic collapse as it renegotiates $16 billion of foreign debt.

“For Ukraine, the big question right now is one of survival,” Kirill Yankovskiy, the director of equity sales at Otkritie Capital Ltd. in London, said by phone Wednesday. “The question is how Ukraine will be able to pull through a turbulent period of economic crisis, conflict in the east, and structural reforms and reshuffling of the entire economy. The risks Russia is facing are not that profound, and as oil is turning around, confidence in the Russian market increases.”

Market Differences

The difference in investor sentiment between the two countries is evident across markets. The ruble is on track for the best monthly performance since at least 1993 and Russia’s overseas borrowing costs have tumbled since reaching the highest in more than five years in December. Ukraine’s currency, the hryvnia, has fallen 53 percent against the dollar this year, the worst rout globally, forcing the central bank to tighten capital controls to keep money from fleeing the economy, while the country’s bonds trade at record lows.

Renewed appetite for Russian assets has been fueled by a 29 percent rebound since January in Brent crude, the oil grade used to price the country’s main export blend, as well as moves to end the separatist insurgency in the Donetsk and Luhansk regions. Ukraine signaled Thursday the latest attempt at peace in its easternmost parts is taking hold and said the military would start withdrawing heavy weapons from the front lines.

In Ukraine, much of the industrial base has been ravaged by the fighting and the economy will probably contract 5.5 percent in 2015, Finance Minister Natalie Jaresko said Feb. 16. Political bickering in Kiev has halted $17.5 billion of emergency loans from the International Monetary Fund.

Temporary Rally

The rally in Russian stocks may be temporary as the country’s dependence on oil will be a drag on the economy while Ukrainian assets will recover with a resolution to the conflict in the rebel regions, according to Nikhil Bhatnagar of Auerbach Grayson And Company LLC.

“Once the geopolitical environment settles down, Ukraine stocks have the ability to outperform Russian companies,” Bhatnagar, vice president at the New York-based research and trading execution firm, said by phone on Wednesday. “The market in Russia is tied to oil prices, and the rally might be short-lived. In Russia’s case, we need the geopolitical situation to stabilize and the price of oil to be higher, which makes it a riskier proposition.”

Moody’s Investors Service cut Russia’s credit rating to junk after markets closed on Feb. 20, saying the conflict in Ukraine and plunging oil prices curb growth and erode financial stability. The move followed Standard & Poor’s decision to cut the country to speculative grade in January. Brent slipped 2.6 percent to $60.05 a barrel on Thursday.

Declining Reserves

The ruble, which traded at about 34 to the dollar last June when oil was above $115, strengthened 0.4 percent to 61.15 on Thursday, on track for a 14 percent advance this month. The RTS Index climbed 3.2 percent to close near a three-month high and a Bloomberg index of the most-traded Russian stocks in New York added 1.2 percent. United Co. Rusal fell 0.9 percent to HK$5.62 at 10:40 a.m. in Hong Kong.

Although the Ukrainian Equities Index has gained 8.4 percent this year, the drop in the hryvnia means foreign investors still suffered losses.

While the U.S. and the European Union accuse Russia of backing rebels with weapons, troops and money — allegations the Kremlin denies — Ukraine hasn’t been able to access IMF funds since September.

“There’s a world of difference between a country that has been junked mainly because of plunging oil prices and the conflict in Ukraine and one that is veering towards a full-blown sovereign default,” Nicholas Spiro, managing director of London-based Spiro Sovereign Strategy, said by e-mail on Wednesday.

“Investors are much more willing to give Russian assets the benefit of the doubt at even the slightest hint of a cease-fire in Ukraine.”

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