(Bloomberg) -- Investors are paying the most on record to hedge against losses in Russian stocks as the conflict in neighboring Ukraine intensifies.

The cost to protect against declines in the Market Vectors Russia ETF, the biggest U.S. exchange-traded fund that holds Russian shares, rose to an all-time high relative to emerging- market stocks, based on implied-volatility data for options. The ETF has lost 8.4 percent since President Vladimir Putin’s intervention in Crimea started on March 1.

Violence is spreading in Ukraine, leaving dozens dead in recent days as the government in Kiev attempts to drive pro- Russian insurgents from the easternmost regions. Concern is mounting that the conflict could further weaken Russia’s economy after the U.S. and Germany said last week they could impose more sanctions if Putin doesn’t pull back support for separatists and allow a May 25 presidential election to proceed in Ukraine.

“As the crisis intensifies the market uncertainty rises,” Ivan Manaenko, head of research at Veles Capital LLC in Moscow, said by phone yesterday. “Trading volumes will remain low for now, while volatility and hedging costs are high as people are waiting for a resolution to the crisis.”

The benchmark Micex Index gained 1.6 percent to 1,319.62 as of 6:38 p.m. in Moscow today, the highest in almost two weeks, trimming its loss this year to 12 percent. The Market Vectors ETF added 2.5 percent to $22.94 while the Bloomberg index of the biggest Russian companies listed in the U.S. rose 1.6 percent to 80.80, capping its retreat since March 1 at 8.6 percent.

VimpelCom’s Retreat

VimpelCom Ltd., Russia’s third-biggest mobile operator, decreased 2.7 percent in New York yesterday to $8.06 for the lowest price level since April 15. The stock is down 38 percent this year. OAO Lukoil fell 0.3 percent to $52.32 yesterday, extending its 2014 loss to 17 percent. In Moscow, Russia’s second-largest oil producer rose 1.1 percent to 1,886 rubles today, rebounding from yesterday’s 1 percent decline.

The pickup in hedging costs is exceeding the surge in options prices triggered when Russia sent troops into Georgia, another former Soviet republic, in 2008 during a five-day war.

Implied volatility, the key gauge of options prices, for contracts with an exercise level closest to the Market Vectors Russia fund has climbed 33 percent since March 1 to 32.23, compared with a decline of 18 percent to 17.72 for the iShares MSCI Emerging Markets ETF, according to three-month data compiled by Bloomberg. The ratio between the two ETFs reached 1.87 on May 2, the highest on record.

Rising Volatility

The cost of options on the funds compares to an implied volatility level of 12.56 yesterday for the Standard & Poor’s 500 Index, the benchmark index for U.S. stocks.

“The cost of hedging will grow and volatility will rise as investors are increasingly concerned over the consequences of the Ukraine crisis for the market,” Ilya Lobanov, head of equity sales at Renaissance Capital in Moscow, said by phone yesterday. “The Russian market will be shrinking in both size and prices due to the geopolitical factor.”

The Russian Market Volatility Index, which measures expected price swings in equities, jumped 11 percent to 43.40 in the three trading days through yesterday, before falling 6.4 percent today to 40.63.

Appetite for exposure to Russian stocks should return after the crisis ends, creating a buying opportunity as some companies are inexpensive, according to Andrey Shenk, an analyst at Alfa Capital LLC.

’Overlooked Fundamentals’

“The market is driven purely by the political factor, and the fundamentals of the companies are being overlooked completely,” Shenk said by phone from Moscow yesterday. The company has more than $3 billion under management, according to its website.

The Micex Index is the cheapest among 21 developing countries monitored by Bloomberg, trading at 4.79 times estimated earnings.

President Barack Obama and German Chancellor Angela Merkel said last week that the scheduled May 25 election in Ukraine is the next trigger point determining whether the U.S. and its allies slap broader economic sanctions on Russia. At a joint news conference at the White House, they said Russia must pull back support for Ukrainian separatists so that the election can proceed unimpeded.

“We are watching a long lasting story of consequences unfold as investors are realizing the negative impact of international sanctions on the Russian economy,” Lobanov of Renaissance Capital said. “I expect a more aggressive selloff after the May holidays in Russia.”

--With assistance from Natasha Doff in London and Ksenia Galouchko in Moscow.

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