UPDATE 2-Russian assets rally on view Western sanctions to be limited

Mon Mar 17, 2014 10:45am EDT

* Russian stock indexes gain 4-5 pct

* Rouble up more than 1 pct against dollar

* Investors shrug off EU, U.S. sanctions

* Recovery may be short-lived as more sanctions loom

By Jason Bush and Vladimir Abramov

MOSCOW, March 17 (Reuters) - Russian shares and the rouble rebounded on Monday on the view that Western sanctions over Crimea would be limited to individuals rather than including trade or financial measures that would inflict significant economic damage.

The region voted in favour of joining Russia on Sunday in a referendum deemed illegal by the West. The European Union has limited sanctions to 21 Russian and Ukrainian officials so far and the U.S. to 11 officials, although more names may follow.

At 1430 GMT the dollar-denominated RTS index was up 4.9 percent at 1,115 points, while the rouble-denominated MICEX was up 3.7 percent at 1,283 points.

"The general belief in the market is that East Ukraine is actually the red line in terms of ratcheting up to much more economically damaging politics," Macro-Advisory consultant Chris Weafer said, referring to fears civil unrest in Russian-speaking regions may give Russia a pretext for military intervention outside Crimea.

"Until it's clear what Russia's intentions in East Ukraine are the market will remain very nervous and very twitchy," Weafer said.

Monday's rally came despite scant evidence of Russia heeding Western demands and Ukraine dismissing as "absolutely unacceptable" a Russian proposal that would include Ukraine recognising Crimea's vote to secede.

Russian President Vladimir Putin will address parliament on Tuesday and is expected to back the outcome of the Crimean vote. .

Many Russian investors appeared to welcome the result of the Crimean vote, with several Russian analysts arguing on Monday that the market was due for a rebound after the sell-off over recent weeks, and playing down the threat of Western sanctions.

"The referendum on March 16 passed peacefully. This fact could cheer investors who are looking at the strongly oversold Russian market," Zerich Capital analyst Oleg Dushin said in a note.

"Of course there will be sanctions from the West, but for the time being they concern officials and not corporate assets. However, anything is possible in future," he said.

The recovery was mostly concentrated in domestic-focused stocks, such as banks and telecoms companies, with energy exporters' shares lagging behind as the oil price fell.

Sberbank was up 7 percent and telco MTS up 5 percent, Gazprom rose 2.4 percent and oil company Lukoil 2 percent.

SHORT-LIVED RECOVERY?

Timothy Ash, head of emerging market strategy at Standard Bank in London, warned that markets' optimistic mood on Monday may be premature as the sanctions threat remains real.

"May be in Russia there is some euphoria in terms of the feel-good factor that they succeeded (in getting Crimea)," he said. "May be there is an assumption that the West will not act. I think that is somewhat mistaken so it may be a short-lived recovery."

He said that the mood in Western countries was that action had to be taken against Russia and that this might ultimately include steps, such as financial sanctions modelled on those against Iran or Syria, that would be highly damaging for Russia's financial system.

"Just a tightening of the regulatory environment around Russian entities will tighten the financing environment for Russian entities making it more expensive to finance themselves," he said.

Konstantin Chernyshev, head of research at Uralsib, also said that it would be wrong to read too much into Monday's market bounce.

"In such conditions speculators are quite active," he said. "Naturally now there are no long-term investments - long-term investors have adopted a waiting position."

"Here one shouldn't deceive oneself... It's too soon to talk about any change in direction or change in the drivers."

The rouble, which edged down slightly in the morning, also saw a strong rally on Monday afternoon. rising 1.1 percent to 36.18 against the dollar and 0.9 against the euro at 50.48.

The rouble was up 0.8 percent to 42.70 against a dollar-euro basket.

"What's happening is that the market is closing 'anti-risk' positions, that is foreign currency bought before the weekend, because of the risk that the Crimea situation would get worse, which didn't happen," Promsvyazbank trader Kirill Grishanov said.

"And because the market was almost entirely positioned long-dollar, then it turns out that there's now nobody particularly to buy dollars."

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