Article / 07 December 2015 at 10:30 GMT

Throwing good money after bad in Russian equities

Russia oil and gas expert
United Kingdom
  • Russian equity inflows hit $200 million but markets unresponsive
  • Much-hyped anti-terror-led equities rally still yet to materialise
  • Rouble manages to hold steady despite the fall in oil prices
  • Central bank determined to keep rouble steady after year-ago slide


Moscow commuters head for work, but an embargo on Turkish fruit and vegetables and looming similar action against Ukraine, might have them worrying about food inflation again. Photo: iStock

By Nadia Kazakova

Two consecutive weeks of near record inflows into Russian equities failed to lift the market. Over $200 million was invested over the last two weeks (ending December 2), with little to show for it.

It is not just the disappointment with the European Central Bank decision and Opec inaction that dragged Russian equities lower. It is the damp squib of an annual address from president Vladimir Putin on December 3. It is the continuous, often unnerving ramblings over Turkey.

It is a looming trade embargo on Ukrainian goods, which, in combination with a ban on Turkish fruit and vegetables, is bound to stoke food inflation.

Investors, however, might be little concerned about these local difficulties, still betting on a just-around-the-corner rally in emerging markets, in the energy sector or, preferably, both. It is possible that the wish might be granted after the Fed hike is out of the way.

Meanwhile, it is very much a case of throwing good money after bad in the equities market.

Weekly fund flows and MSCI Russia Index performance

Last week, the disconnect between money invested and equity returns achieved was quite noticeable. Usually, the news of such a significant fund flow (nearly $106 million to December 2) would see the equities perk up, at least on the day (data was published early December 4 in Moscow).

On this occasion, the MSCI Russia Index dropped 2% for the day, despite the Brent Index, for example, being virtually unchanged.

Relative and absolute performance of MSCI Indices, Brent Index and the rouble

It is interesting that the rouble was holding relatively well against the weak oil price and the falling share prices. The Russian currency was 2% down week-on-week against the USD compared to a 4.7% w/w drop in the ICE Brent Index and 5.8% w/w decline in MSCI Russia Index.

There could be a coupls of reasons for the resistance. 

The central bank must be keen to avoid a repetition of last year's currency calamity. The regulator has a better hand this December: a good handle of companies' FX positions and their debt repayment needs, ability/desire to provide FX to Russian banks as needed (the bank will re-opens its 12-month FX repo facility on December 14).

There is also a large amount of FX reserves to be sold by the government in December to cover the federal budget deficit. As much as $7.5 billion is likely to be converted into some RUB500 billion, around mid-December. 

In addition, currency speculators are biding their time, unwilling to take too large a directional bet on the Russian currency.

Weekly positions in rouble futures and options by leveraged money managers

The latest data from the COT report shows that leveraged money managers/hedge funds have increased their net short position in rouble futures. It is, however, primarily down to a cut in both long positions (628 contracts). Short positions were also down by 65 contracts. The total net short, as a result, increased to 803. 

Overall, however, hedge funds account only for about 5% of all contracts on the long side and just over 7% on the short side. It is probably wise, given clear upside risks (especially the sale of FX reserves) and downside uncertainties (politics).

Moscow's business district gleams, but all is not well in the world of Russian equities
after $200 million in inflows in the last two weeks failed to lift the market. Photo: iStock

— Edited by Martin O'Rourke

Nadia Kazakova is a specialist on Russia, particularly the oil and gas sector


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