abandoned Russia's stock market long before crisis erupted in the
Crimea. Sanctions announced Monday can only worsen the plight of
Russia ETFs, already the world's worst-performing so far this
In response to Sunday's referendum in Crimea, the European
Union and U.S. announced sanctions against several Russian and
Ukrainian officials. They will be banned from traveling and will
see their assets frozen.
"The international community may believe that only limited
sanctions are required for the threat of economic fallout in
Russia to become self-fulfilling, manifesting itself principally
in a flight to U.S. dollars, damage to Russia's external position
and ultimately impacting growth in economic activity via
depletion in consumer and investment confidence," Alexander
Redman and Arun Sai, research analysts at Credit Suisse, wrote in
a client note released Monday.
Russia's stock market could sell off an additional 28% if
financial sanctions are imposed, they wrote. It could trigger
capital quarterly outflows of $50 billion, amounting to 9.4% of
gross domestic product annualized, which would be the most since
the Q4 2008. The ruble would depreciate against the euro and the
dollar and Russia's sovereign bond yields would soar to 10%.
Yields soared to 12% during the 2008 global financial crisis.
Given the February manufacturing data released before the
referendum, GDP was expected to grow 1.5%. Redman and Sai
forecast Brent crude
($107 a barrel as of Monday) will rise to $115 a barrel,
considering that half of Russia's oil exports are transported
through Ukraine. The government's current expectations for 2.4%
economic growth this year would plummet to zero.
With a price-earnings ratio of 6, Russian equities are trading
at a 51% discount to emerging markets based on 12-month forward
earnings estimates, Redman and Sai wrote. The current
price-to-book value of 0.7 is the cheapest, relative to emerging
markets, since the 1998 Russian crisis.
Despite the low valuations, Redman and Sai believe Russia's
remains unattractive. Earnings per share in 2014 and 2015 are
expected to decline 1% to 3.5%. Earnings revisions have been
negative the vast majority of the time since June 2010, owing to
China's economic slowdown and poor government policies.
The U.S. shale boom along with a new generation of
fuel-efficient vehicles and a decline in U.S. driving have
depressed energy prices and will continue to do so for the
foreseeable future, Redman and Sai wrote.
In addition, Russia's leadership has failed to encourage
investment and the country ranks as the most corrupt among those
in the MSCI Emerging Markets index.
"Russia has undergone the worst deterioration in political
rights and civil liberties of any large emerging market over the
past decade according to Freedom House. It now rates only
fractionally freer than China," Redman and Sai wrote.
Market Vectors Russia (
), one of the world's most volatile funds, has plunged 17% in the
past month, while its benchmark, iSharesMSCI Emerging Markets (
), has fallen 3%. It has significantly underperformed for three
years. RSX sold off 24% year to date vs. 8% for EEM. It lost 22%
and 16% annualized over the past one and three years while EEM
declined 9% and 4% over the same periods.
RSX rallied 6% the past two sessions in heavy volume, but
remains 25% below its 52-week high.