Russian assets rally, shrugging off Western sanctions

[July 30, 2014]  By Alexander Winning and Lidia Kelly

MOSCOW (Reuters) - Russian assets rallied on Wednesday, shrugging off a new round of Western economic sanctions on Moscow as investors deemed the punitive measures less severe than first feared and analysts said their impact was already priced in.

Brussels and Washington ratcheted up sanctions on Tuesday, targeting Russia's energy, banking and defence sectors over what they say is Moscow's support for rebels in eastern Ukraine.

But the European Union said its measures would be reviewed after three months, and none of the sanctions will extend to existing holdings of debt or equity for the Russian companies affected, both of which came as a relief for investors.

"There is an underlying sense that the West still does not really want to bite the bullet and roll out a meaningful sanctions regime," said Timothy Ash, head emerging markets analyst at Standard Bank in London.

"It has the toolkit to hurt Russia but would rather not for fear of the collateral damage back to its own business interests," Ash said in a note.

Russia's main share indexes opened lower before rising more than 2 percent by early afternoon trading. The rouble strengthened around 0.5 percent against both the dollar and the euro, bouncing off a three-month low, while there were gains for Russia's sovereign bonds.
 

Russian markets have fluctuated wildly this year due to fierce fighting in former Soviet republic Ukraine and the threat of economic sanctions from the West over Moscow's perceived backing for pro-Russian rebels fighting forces loyal to Kiev.

New sanctions had been widely anticipated ever since Western countries accused pro-Russian rebels of shooting down a Malaysian airliner on July 17, killing all 298 aboard.

Erik de Poy, an equities strategist at Gazprombank in Moscow, said the stock market was relieved the EU's latest sanctions would be reviewed after three months.

"The market's focusing on that. But volumes are low in the summer so the move isn't that indicative," he said. "I still think we're entering a qualitatively different investing environment in Russia."

Russia's dollar-denominated RTS index was 2.5 percent higher at 1,237.3 points by 0945 GMT. The rouble-traded MICEX rose 2.2 percent to 1,399.4 points.

Russia's second-largest bank VTB, which the United States sanctioned along with VTB subsidiary Bank of Moscow and Russian Agricultural Bank, underperformed. Its shares fell 0.5 percent on MICEX.

In currency markets, the rouble strengthened by 0.49 percent against the dollar to 35.63 and by 0.55 percent against the euro to 47.75.

That left the Russian currency 0.53 percent stronger at 41.08 versus the dollar-euro basket the central bank uses to guide the rouble's nominal exchange rate.

Among the factors driving the rouble higher, Pavel Demeshchik, a trader at ING Eurasia, cited short-term buying from overseas speculators who see the Russian currency as oversold.

The yield on Russia's benchmark Eurobond maturing in 2030 fell to 4.55 percent from 4.77 percent on Tuesday. Moscow's debt insurance costs fell, retracing some recent gains as analysts said the sanctions were now largely priced in.

Russia's five-year credit default swaps dropped 4 basis points from Tuesday's close to 227 bps, according to Markit.

For rouble poll data see

For Russian equities guide see

For Russian treasury bonds see

Russia in graphics: http://link.reuters.com/dun63s

(Additional reporting by Vladimir Abramov; Editing by Elizabeth Piper and John Stonestreet)

[© 2014 Thomson Reuters. All rights reserved.]

Copyright 2014 Reuters. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.