Another pretty disappointing week for Russian equities trading abroad, although gold and other metals sparkled in a heap of otherwise gloomy economic data.
At home, Fitch ratings agency downgraded its debt rating for Russia to BBB, and the rouble played a game of cat and mouse with the Central Bank, hovering within one per cent of the CBR's floor for the currency. Internationally, crude was sluggish, despite high inventory data.
Line in the snow
Investors saw no relief from the rouble slide this week, with the currency trading within a percentage of 41 to the dollar-euro basket for much of the time, before briefly breaking through that barrier Thursday lunchtime. The Central Bank reacted coolly, and pledged another billion dollars to defend the currency. However, what were once seemingly limitless reserves are depleting: analysts say the CBR now has only US$120 billion left to defend the rouble, with the rest of the US$386.5 billion either in Finance Ministry coffers, or pledged elsewhere. There's an increasing amount of sentiment suggesting that the CBR's repo liquidity injections are a large part of the problem, with almost everyone getting access to liquidity using it to take short positions on the rouble. It’s believed a more subtle and nuanced approach to system liquidity may see some of the shorting shaken out – at least inside Russia.
However badly the continuing rouble depreciation reflects on the reliability of the currency, the government's ability to control it and the state of Russia's economy in general, exporting companies do benefit. Polyus Gold and Polymetal were shining examples of that this week – more on them later.
Fitch downgrade
On Wednesday, the Fitch ratings agency added to the gloom by announcing it was downgrading Russia's sovereign debt rating to BBB with a negative outlook, the agency's second lowest investment grade. History buffs will note the last time Fitch downgraded Russia was a month before the 1998 default. The reasoning is pretty self-evident – Russia is spending its financial reserves at an alarming rate and the current price of oil makes it unlikely the country will accrue any more – meanwhile capital flight continues. This latest indication that Russia is being deeply affected by the financial crisis will put even more pressure on the rouble. According to UralSib chief strategist Chris Weafer, “the agencies are telling the government that it cannot afford to continue supporting the rouble by using financial reserves at the previous rate and still retain the country’s investment grade status.” In short, Fitch's downgrade will make investors think twice about investing in any Russian stocks at all.
Don't bank on banks
Another week of bad news in the banking sector, as Fitch downgraded 14 Russian lenders, including the top two players, Sberbank and VTB, and state development institution VEB. Fitch cited a deterioration in the government's ability to provide support if needed. Goldman Sachs lowered its price recommendation on VTB, saying credit quality was worsening faster than the broker had expected, and Morgan Stanley lowered its rating on the stock to “underweight”. VTB also said it may sell new common shares to raise capital.
Some better news, the Finance Ministry has pledged US$40 billion in Tier 1 and Tier 2 capital to domestic banks, in part by way of a capital increase for VTB and VEB of US$2.7 billion and US$5.5 billion respectively. That's despite the revelation that much of the capital injection previously handed out to boost lending was in fact used to bet against the rouble. Abroad, Deutsche Bank posted its first loss in 52 years, but VTB still managed to add 6% over the week.
Crude sluggish
US inventory data showed this week that stores of crude were up by more than analysts expected. But the price didn't collapse as it has in the past, with insiders acting on a feeling that OPEC has a bit more of a handle on the situation. All in all, a bit of a non-week for oil stocks, with investors running with what little profit there was at the end of the week. That left Lukoil down 3%, and Rosneft up just 1%.
Steel and gold
Steel and gold were rare bright spots this week, with increased demand boosting both metals.
Russian steel trading abroad reacted to a reported hike in export prices, and there was a rise in the purchasing managers' index in China, a good economic indicator. That encouraged hopes of more buying of steel in the resource-hungry country. More locally, the Baltic Dry Index, which is used as a gauge for demand, has been advancing for the last two weeks. That pushed Severstal up 43% for the week and Novolipetsk 41%.
Major Russian steel firms Mechel, which trades in New York, and Evraz were rated underweight by Alfa Bank this week. The brokerage cited weak earnings, which it claims are driving both close to insolvency. Despite that, and some profit taking in the sector towards the end of the week, both the steel giants gained, Evraz by around 40% and Mechel (as of 20:00 Moscow time Friday) by 10%.
Gold shone out as a beacon of stability in the current economic climate this week. Analysts also predicted the precious metal would rise to an average of US$1,000 an ounce this year, because of its properties as a useful hedge against inflation as global central banks cut interest rates to revive their economies. Although there's been some profit taking in this sector too, Polymetal and Polyus Gold both finished the week around 20% higher. But the standout winner in the Russia-related gold sector in London was KazakhGold, which climbed the most on record on Tuesday, following a bondholder vote which eased the way for Polyus to acquire the Kazakh mining company. KazakhGold rose 68% for the week.
Other losers
Peter Hambro Mining, the second-largest gold producer in Russia, has launched an all-stock takeover bid for iron ore producer Aricom. The deal is expected to be worth as much as US$428 million. Also this week, Hambro announced it has raised just under US$100 million through a sale of shares to institutional investors to reduce its debts. That worried analysts, who said it shows all is not well with the company's development process. Ultimately, even the promise of a higher gold price couldn't help Hambro this week – the company's shares ended the week down 15%. Aricom's, on the other hand, rose nearly 31%.
The Uralkaly mine accident saga continues, with a government investigation concluding this week that Russia's second-largest potash producer was partly liable for a 2006 flood in one of its mines. The flood opened up a sinkhole and endangered a key export rail link. Uralkaly previously volunteered to pay for some of the damages, but judging from the results of the probe, the firm may now have to sink up to US$86 million into compensating the state and Russian Railways. Uralkaly's stock is down 25% in London for the week.
Laura Emmett, RT