August: a bad month for Russian assets (Russian DRs conversion in focus)
smartmoney.oneWe forecast that sales of Russian depositary receipts during August's conversion could range between $5 bln and $18 bln, including sales by foreign-controlled companies (CFC).It is also important to take into account the Bank of Russia's daily limit on the sale of securities after conversion at 5% of such securities received by the holder, compared with 0.2% previously.Therefore we do not expect the market to slide sharply, MOEX may fall as much as 10-15% following such sales, to 1 880 p. We assume that residents will decide to sell 10–50% of their receipts after conversion.In April, during the first phase of the DR conversion, MOEX dropped 23%, before recovering by 12% in May.The index stopped falling after the EU imposed sanctions on the National Settlement Depository (NSD) and the conversion window closed.Since then the Russian equity market has not recovered to its peak level of early April and is still 23% below that high.Conversion was announced in advance and investors are expecting for the Russian index to decline especially after August 15, so they can partly offset the likely slump in equities, but the fragile market will not hold up amid massive sell-off due amid weak fundamentals and tougher sanctions.The rouble decline is inevitable given a new budget rule that is expected to be set shortly. The president has ordered to submit proposals to adjust the budget rule and currency buying rule after receipts conversion by July 25. In our view, the rouble could weaken against the dollar to ₽65.5/$ and against the yuan to ¥9.8.We estimate that holders won receipts worth ₽7,728 bln ($124 bln), of which ₽5,410 bln ($87 bln) are held by non-residents and ₽2,318 ($37 bln) by residents.
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