Traders who sent wagers against Russian stocks to a record high in March before getting burned by a rebound of more than 20 percent are showing no interest in betting against President Vladimir Putin a second time.
Even with Russian equities poised for the worst month since May 2012 on Putin’s intensifying standoff with the U.S. and the European Union over Ukraine, investors profiting from declines are staying away from boosting their positions against the Market Vectors Russia ETF, the largest exchange-traded fund tracking the nation’s companies. Short interest on the $1.46 billion ETF was 6 percent of shares outstanding as of July 29, down from an all-time high 21 percent on March 3, according to data compiled by Markit.
After the U.S. and EU began imposing sanctions against Putin four months ago, a thaw in the conflict with Ukraine spurred a bull market in Russian stocks that forced short sellers to unwind more than 75 percent of all bearish wagers against the ETF in a month. The fund, which soared 29 percent between March and July, added 2.6 percent to $24.46 yesterday after a round of new international penalties which some investors saw as milder than anticipated.
“Many people are staying away from betting on or against the market because everything depends on the Russian government’s actions,” Sabina Mukhamedzhanova, a fund manager at Promsvyaz Asset Management in Moscow, which manages about 17.9 billion rubles ($500 million), said by phone on July 29. “There’s no clarity regarding what’s going to happen.”
Short sellers scaled back bets as Russia’s Micex Index entered a bull market on June 6 after rising more than 20 percent from a low on March 14, the last trading day before citizens of Ukraine’s Crimea peninsula voted in favor of joining Russia. The ETF reached a 2009 low in March before rallying to a five-month high in July on bets the crisis would de-escalate as Putin began talks with Ukraine’s new leader and asked lawmakers to revoke the right to use force in the neighboring country.
Bearish investors haven’t been lured back even as the selling of Russian stocks resumed amid renewed tension. The benchmark index has slumped more than 6 percent this month as the U.S. and EU went ahead with sectoral sanctions targeting the Russian economy after months of separatist unrest in Ukraine’s easternmost regions and the downing of a Malaysian Air jet over the country.
EU governments agreed on July 29 on their most sweeping sanctions against Russia to date, barring state-owned banks from selling shares or bonds in Europe, restricting the export of equipment to modernize the oil industry and prohibiting export of equipment with military uses.
That was followed hours later by U.S. penalties against three Russian banks, including VTB Group, and a state-owned shipbuilder. The measures prohibit U.S. persons from transacting with, providing financing for or otherwise dealing in new debt of longer than 90 days maturity or new equity with the three banks, the U.S. Treasury Department said on its website.
“Now we’re seeing just another stage of the conflict and probably because of that the reaction and willingness to short is more restrained,” Vladimir Vedeneev, chief investment officer at Raiffeisen Capital in Moscow, wrote in an e-mail on July 29. “And of course the market’s rally in the second quarter made the short sellers think twice.”
Traders wary of more losses took $12.3 million out of the Market Vectors Russia ETF last week, according to data compiled by Bloomberg. The moves contributed to $91 million of redemptions so far in July, putting it on pace to be the biggest monthly outflow since February. Short interest on the ETF is up from a low of 3 percent at the beginning of June.
The Micex trades at 5 times estimated earnings, making it the cheapest measure among 21 emerging markets tracked by Bloomberg. That compares with a multiple of about 5.8 in January, before Russia’s incursion into Crimea. The Micex rose 1 percent to 1,396.36 by 10:33 a.m. in Moscow today.
“It’s very difficult to make any reasonable expectations, as for the time being the market is being driven by political headlines and political statements,” Rustam Mursalimov, a portfolio manager at Gazprombank Asset Management in Moscow, wrote in an e-mail on July 30. “It is totally rational to take profits on shorts, but I believe market participants are still afraid to build significant long positions.”