Russian Media Stocks Lead Drop as Ukraine Crisis Deepens

By Halia Pavliva

Media companies led a rout in Russian stocks in New York after Mail.ru Group Ltd. (MAIL), which operates the country’s biggest social networks, cut its sales forecast amid a slowing economy and tension in Ukraine.
Yandex NV, Russia’s largest Internet company, fell for a third day and CTC Media Ltd., which owns the nation’s sixth-biggest TV station, declined the most in two weeks on Aug. 22. Mail.ru plunged 12 percent in London. The Bloomberg Russia-US Equity Index of the country’s most-traded shares in the U.S. slumped 0.8 percent after stocks in Moscow ended a ten-day advance, the longest stretch of gains in almost nine years.
Mail.ru reported first-half earnings that trailed estimates and reduced its full-year sales growth forecast, citing a drop in advertising revenue caused by a “more challenging” economic and political environment. The Micex Index slumped and the
ruble weakened as hundreds of Russian trucks crossed the Ukrainian border Aug. 22, stoking concern the nation’s $2 trillion economy, which has grown at the weakest pace in five quarters, will further deteriorate amid U.S. and European Union sanctions.
“Investors’ perception of Russian Internet and media stocks as a safe haven against a slowing economy has vanished with Mail.ru’s guidance cut,” Sergey Vasin, an analyst at OAO Gazprombank who has a buy rating on Yandex, said by phone from Moscow on Aug. 22. “People are cutting spending on some types of ads as the economy slumps further. Yandex still looks like the best bet in the sector as text-based ads, its main source of revenue, are very much in demand even in a slowdown.”

Sales Forecast

Futures on the dollar-denominated RTS stock index expiring next month slipped 0.4 percent to 125,230 in U.S. hours Aug. 22. The RTS Volatility Index, a measure of anticipated swings in the futures, added 3.4 percent to 32.24. The Market Vectors Russia ETF (RSX) fell 2.1 percent to $24.91, decreasing its weekly gain to 2 percent.
Yandex slid 2.4 percent to $29.08, trimming its gain last week to 2.4 percent. CTC Media dropped 3.1 percent to $9.51, reducing its weekly advance to 0.4 percent.
Mail.ru sank to $28.80 in London, ending a nine-day stretch of gains and widening its 2014 plunge to 35 percent. Sales will grow 14 percent to 18 percent this year, down from a previous forecast of as much as 24 percent, the company said in an Aug. 22 statement. The company also reported first-half revenue that trailed estimates.

‘Wake-Up Call’

OAO Mobile TeleSystems (MBT), Russia’s largest wireless operator, also cut its 2014 sales forecast last week after reporting a 2.6 percent drop in second-quarter operating income. MTS gets 10 percent of its revenue from Ukraine.
“The reduction in earnings forecasts by Russian companies is a wake-up call,” Ilya Kravets, New York-based director of investment research at Daniloff Capital LLC, said by phone on Aug. 22. “Economic growth is slowing, while the conflict with Ukraine has failed to de-escalate and is intensifying instead.”
The Micex declined 1 percent in Moscow. The U.S. said more sanctions may be imposed if the convoy of about 280 trucks filled with what Russia says is humanitarian aid is not removed. The Ukrainian government called the trucks’ entry into its territory without permission an “invasion.”
Oana Lungescu, a spokeswoman for NATO, said by e-mail Aug. 22 that the alliance has received “multiple reports” of direct involvement of Russian airborne, air defense and special operations forces in eastern Ukraine. Vitaly Churkin, Russia’s ambassador to the United Nations, denied military involvement.
United Co. Rusal (486), a Moscow-based aluminum producer, dropped 1.3 percent to HK$3.93 in Hong Kong trading as of 10:09 a.m. local time.
“Russia remains the equivalent of investing in a frontier market subject to violent turns of events and without the full protections of a civilized society,” Albert Brenner, who helps manage $5.5 billion as director of asset allocation strategy at People’s United Wealth Management in Bridgeport, Connecticut, said by e-mail Aug. 22. “Russian equities remain appropriate only for the most adventuresome investors with the capacity to assume large risks and to absorb large losses in order to realize large but highly uncertain gains.”