International investors withdrew almost $130mn from the Russian stock market last week – the biggest outflow in three months and reversing the previous inflows on the back of improving sentiment towards emerging markets (EMs) in general, reports Kommersant, citing Emerging Portfolio Fund Research (EPFR).

The reasons for the outflows are several, but the main concern is the risk posed by an increase in the sanctions pressure from the West, although the arrest of US fund manager Michael Calvey on February 14 is thought to have played an important role as well.

The outflow of foreign investors from the Russian stock market accelerated sharply this week, according to Merrill Lynch data, which includes the data from EPFR. 

For the week ending February 20, clients of dedicated Russia funds took $127mn out of the market. A week earlier, the outflow was only $15mn. The last time the outflows increased so quickly was in December 2010, when a record $190mn was withdrawn in one week.

While the Calvey affair has given Russia yet another bloody nose, the threat of sanctions is the bigger problem. The new “crushing” sanctions were supposed to be imposed at the end of last year, but were delayed due to the mid-term US elections and then the holiday season. While the terms of the new sanctions have not been decided, investors fear they will, like the April 6 round of sanctions target oligarchs, large companies and possibly Russian state debt, that could cause wide spread damage.

Two weeks ago, the Financial Times, citing diplomatic sources, reported on upcoming anti-Russian sanctions that may be imposed thanks to Russia’s reluctance to release 24 Ukrainian sailors arrested following a naval clash between Russian and Ukrainian ships on the Sea of Azov on November 25.

“The first massive outflow from the Russian funds was caused by sanctions risks, which returned to the agenda at the end of last week. Today it is the main factor reducing Russia's investment attractiveness," said senior analyst at Raiffeisen Capital, Sofia Kirsanova, as cited by Kommersant. 

The main issue concerning EM investors is the ongoing US-China trade negotiations that are close to a conclusion. 

“Less than a week remains before March 1, the deadline for concluding a trade agreement. If countries fail to agree among themselves, the United States promises to increase import duties on Chinese goods from 10% to 25%,” says Mikhail Ivanov.

However, Russian stocks were rising again on February 25 as it appeared the Sino-US trade negotiations were going to end well, but their growth was curbed by oil prices switching to a decline in the middle of the day, analysts said.  

The ruble denominated Moscow Exchange Index (MOEX) Russia Index rose 0.24% to 2,494.63, close to an all time high, while its sister index, the dollar denominated Russia Trading System (RTS) increased 0.26% to 1,201.57. Since the start of the year MOEX is up 5.2% and the RTS index is up 12.3%.

“The MOEX Russia Index and the RTS Index are finishing the day in a symbolic plus, departing from the session’s high. The ruble indicator could not hold above the psychologically important mark of 2,500 points, and the dollar one consolidated into the area of 1,200 points thanks to the strength of the ruble against the dollar,” Veles Capital analyst Yelena Kozhukhova said, as cited by PRIME.

 

Fund flows into Russia: black - RTS, blue - global funds, red - country funds, souce: Kommersant