Russian Equities Weekly 17-21 May, 2021: Sanctions risk more likely to evaporate

Russian equity market dynamics

Last week, the Russian equity market slightly underperformed the broader emerging market (EM) index, by 0.2%.

The relative underperformance was mainly due to the difference in the two indices’ sector structures:

  • Overweight of the Russian index in the materials sector, which declined on the back of lower metals prices
  • Overweight in the energy sector, due to the decline in oil prices amid talks about the potential removal of US sanctions on Iranian oil
  • The absence of the consumer discretionary and IT sectors in the Russian index, which rose by 3.2% and 2.7%, respectively, after previous strong underperformance.

Russia-specific factors almost completely offset the negative impact from the sector-specific factors. This was mainly due to increased optimism of investors amid the US decision to waive sanctions on the company in charge of the Nord Stream 2 pipeline.

  Week YTD
MSCI Russia 10/40 TR in USD 1.5% 10.9%
MSCI EM index TR in USD 1.7% 3.6%
Excess return -0.2% 7.3%
Due to Russia specific factors* 0.9% 1.5%
Due to difference in sector structure* -1.2% 5.8%
Key commodities**
Oil -3.5% 29.7%
Gold 2.1% -0.6%
FX
RUB/USD 0.5% 0.5%
RUB/EUR 0.0% 0.0%
* See details of methodology in the end of the report

** We use Brent Oil and LBMA Gold price data, in USD terms. Energy weight in the MSCI Russia 10/40 is 33%; gold producers’ weight in the index is 9% (as at the end of March 2021)

Data as of 21 May 2021

TKB Investment Partners (JSC) calculations; Bloomberg

  Current
Upside/downside to fair price 7%
Data as of 21 May 2021
TKB Investment Partners (JSC) calculations

Main Russian news

The US administration is not going to impose new sanctions on Nord Stream 2 AG – the company in charge of building the Nord Stream 2 gas pipeline. Meanwhile, sanctions are being imposed on 13 Russian vessels and four other companies participating in the project, including the Russian government-owned Marine Rescue Service. In a report to Congress on 19 May, the US State Department said that Nord Stream 2 AG and its CEO Matthias Warnig are engaged in sanctionable activity but the administration will waive penalties to avoid a confrontation with Germany and other European Union allies that back the project. As of the end of March, 95% of the pipeline was complete and the project is likely to be fully completed this year. We think the successful launch of the Nord Stream 2 project could a trigger for a further evaporation of sanctions risk from Russian equities prices. Please see further details in “Russian equities riding the long-term commodities growth trend”.

 

Author: Marina Tsutskiridze, Investment Specialist

Sources: Rosstat, Bloomberg, TKB Investment Partners (JSC); May 2021

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