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By Bloomberg

Russian stocks gained to a 3 1/2-year high as easing price swings in the ruble and prospects for European Central Bank stimulus emboldened investors to take more risk.

The Micex Index, which is denominated in rubles, rose 2.6 percent to 1,660.86 by 2:28 p.m. in Moscow, extending the best rally globally this year to 19 percent. Investors who avoided Russian assets in 2014 as the ruble slid 46 percent against the dollar are returning after volatility in the currency fell behind most peers in developing Europe in the past week.

Speculation the ECB will announce asset purchases today is leading to a hunt for bigger returns, raising the appeal of Russia, where corporate earnings as a proportion of stock prices are about 40 percent more than emerging markets as a whole. Investors are demanding higher returns for taking on the risk that the world’s largest energy exporter will lose its investment-grade credit rating amid an oil-price slump and sanctions over the Ukraine conflict.

“There’s a sense that the ruble has stabilized for the time being and it’s safe to buy local shares,” Oleg Popov, a money manager at Allianz Investments in Moscow, said by phone. “Russian local stocks are cheap in rubles, so investors are able to put their dollars to good use and get more shares of the companies they like.”

The Micex trades at an earnings yield of 11.3 percent, compared with 8 percent for the MSCI Emerging Markets Index. One-week historical volatility in the ruble was 5 percent today, the lowest after the Czech koruna among 10 currencies in emerging Europe, according to data compiled by Bloomberg.

‘Main Beneficiary’

Swings in the Polish zloty were more than double the ruble as Switzerland’s move to abandon the franc’s cap last week spurred speculation the country could face growing bad loans since 46 percent of its mortgages are denominated in francs.

An ECB Executive Board proposal foresees asset purchases of as much as $1.28 trillion through the end of 2016, according to two euro-area central-bank officials who have seen the document. The ECB policy meeting concludes today.

“We would reduce shorts in Russia going into the ECB meeting, as Russia may be, counterintuitively, the main beneficiary of credible quantitative easing,” David Hauner, the head of cross-asset strategy at Bank of America Corp., said in a note to clients.

Russia’s currency strengthened 0.2 percent to 65.2195 per dollar today, trimming its decline in January to 6.9 percent. Government bonds also rose, sending the five-year yield down 16 basis points to a five-week low of 15 percent.

Downside Risks

Not everyone is optimistic about Russian shares. Kapital Asset Management LLC this year sold off the Russian equity holdings it accumulated in 2014 and isn’t buying, according to Vadim Bit-Avragim, a money manager at the Moscow-based company.

Standard & Poor’s is reviewing Russia’s credit rating, saying last month there was at least a 50 percent chance the sovereign will be cut to junk this month. Bloodshed has also worsened in eastern Ukraine, where the U.S. and European Union argue Russia has been arming and aiding rebels.

While the Micex is off to the strongest start for a year since 2000, the dollar-denominated RTS Index gained 1.4 percent in the period.

“The market has yet to price in Russia’s cut to junk by S&P, so I don’t exclude that we might see the next wave of correction before the end of the month,” Bit-Avragim said.

Cheapest Multiple

The Micex trades at the cheapest multiple in emerging markets, reflecting investor concerns over an economic slowdown as analysts project gross domestic product will shrink 3.2 percent this year. Oil, which along with natural gas accounts for about 50 percent of Russia’s budget revenue, slumped almost 60 percent from its June peak. Brent crude climbed 0.9 percent to $49.49 a barrel.

More than half of the Micex’s 50 members trade above their 50-day moving average, according to data compiled by Bloomberg. OAO Lukoil and OAO Gazprom led gains in the Micex today, climbing 3.9 percent and 2.1 percent, respectively.

“QE is positive for real assets like gold and oil and is helping Russia despite the absence of a ruble rebound,” Martial Godet, the head of emerging-market equity and derivatives strategy at BNP Paribas SA in Paris, said by e-mail.