Russia’s stock market is set to have a partial reopening on Thursday, almost a month after it closed down following the invasion of Ukraine.
The challenge for Moscow is that the resumption of trading can simply send Russian stocks back into free fall. On February 24, the day President Vladimir Putin began attacking Ukraine, Russia’s main stock index fell 33%. While the index recovered a fraction of those losses on February 25 – its last trading day – it was before Western sanctions hammered the ruble and sent the country into an economic crisis.
To limit the fallout, Moscow has turned to some harsh policies. It blocked foreign investors from dumping local stocks – a move that some market participants saw as retaliation for a Western freeze on Russian central bank assets, as much of the Russian market is owned by foreigners. The Russian government ordered its sovereign wealth fund to buy billions of dollars worth of shares.
The Russian stock market could ultimately look very different than it did before, with a plan under discussion to split it into separate markets for foreign and local investors, according to a person familiar with the matter.
Russia’s central bank said on Wednesday it would allow trading in 33 stocks out of 50 included in the benchmark stock index, MOEX, on Thursday from 9:50 to 14:00 Moscow time. Among the companies to be traded are Gazprom PJSC and Lukoil PJSC. Betting on the fall of a stock, known as short-selling, will be prohibited.
The headquarters of Russia’s central bank, which has said the country’s financial markets will reopen in phases.
Photo:
Andrey Rudakov / Bloomberg News
According to a policy announced by the central bank on February 28, Russian brokerage firms are not allowed to let foreign clients sell securities. This will prevent foreigners from frolicking after the exits as soon as the market reopens, which can be devastating due to their large role in Russian equities. International institutional investors owned about three-quarters of the Russian market’s free float in February 2020, according to Sberbank Investment Research.
This has given rise to concern that the market will be skewed by the absence of foreign investors, who accounted for almost half of the stock trading on the Moscow Stock Exchange in the first half of last year.
“There will be an illusion of a functioning, recovering Russian stock market, even though a large class of market participants – foreigners – will not have the opportunity to sell,” said Vladimir K factel, CEO of ETF Consulting, a Moscow firm. advises issuers of exchange traded funds.
Among the Western investors who owned Russian stocks before the freeze were asset management giants Vanguard Group and Fidelity International. Both companies have said they are reducing exposure to Russia.
Due to the freeze, foreign investors will not have much to do when the stock market reopens.
But the plan, which is under consideration by Russian officials – which is still in the discussion stages – would effectively split the country’s securities market in two, with one market for foreigners and another for local investors, said a person familiar with the matter. In this scheme, foreign investors could sell their shares or bonds, but would face restrictions on moving the proceeds out of Russia due to capital controls that Moscow has introduced since February, the person said.
Such a two-tier market can result in oddities, such as the same stock having two different prices. It is not entirely without precedent. In China, there have long been discrepancies between stocks on mainland stock exchanges in Shanghai and Shenzhen and those listed in Hong Kong.
It could also prevent further erosion of the value of the ruble. Russia’s currency has stabilized in recent sessions to trade close to 104 rubles against the dollar, although it remains 22% weaker than before Russia invaded Ukraine.
“The biggest fear is that the central bank is under sanctions and they do not want foreign investors to sell their shares and take the ruble and buy hard currency,” said Jacob Grapengiesser, head of Eastern Europe at emerging markets fund manager East Capital.
The Moscow Stock Exchange said on Monday that it would allow for the settlement of trades that foreign investors had placed before February 28 and which were still pending. Mr. Grapengiesser said his company had trades that are still awaiting settlement from the start of the war and which he expects to go through soon.
“It is a natural step before opening the market. You have to take care of the unresolved trades, “he said.” Things are slowly moving forward. “
Shortly after the war began, Russia’s prime minister ordered the country’s National Wealth Fund to buy up to a trillion rubles, equivalent to $ 9.38 billion, in shares this year. Analysts also expect some Russian oil companies to support their stock prices with buyback programs.
Local investors can also buy shares. When Russia invaded Crimea, MOEX fell almost 18% between mid-February and mid-March 2014. But by the end of that year, it had returned by more than 12% from its lowest point in March. The broad index has shown progress in all but one year since 2014. Equities in volatile countries can also serve as hedging against inflation because locals expect companies to offset rising costs by charging higher prices.
A board showing the exchange rates of the US dollar and the euro against the Russian ruble in Moscow last month. Western sanctions have since hammered the ruble.
Photo:
dimitar dilkoff / Agence France-Presse / Getty Images
The government’s efforts have led some to be cautiously optimistic about the reopening. “Initially, I think there will be a moderate correction,” said Natalia Smirnova, a financial adviser in Moscow. “But I do not want to rule out the possibility that the first day may end with a modest increase.”
Russia is a minow of a financial market in global terms. In December 2021, the total market value of companies listed on the Moscow Stock Exchange was around $ 842 billion according to the World Federation of Exchanges, which is just under 90% of the current value of Tesla Inc..
That made the Moscow Stock Exchange the 20th largest stock market by market value, just above Brazil’s B3 stock market in the WFE’s ranking of global stock markets.
Until the war, Russia mostly attracted the attention of specialized emerging market funds and hedge funds, although it accounted for only a fraction of the holdings of most globally minded investors.
MSCI Inc..
said it would drop Russian equities from its influential indices tracking new markets. Prior to the war, MSCI’s emerging market index weighed 2.8% for Russia. FTSE Russell has also announced plans to remove Russian stocks from its indices. The measures will force investors, whose holdings track the indices, to sell – when they can.
Wars have in the past led to closures in the stock market, though this is unusual. The New York Stock Exchange closed for about four months when World War I broke out in 1914, the longest closing in NYSE history. The Beirut Stock Exchange reopened in 1996 after a nearly 13-year closure caused by Lebanon’s civil war.
The consequences of severe economic sanctions against Russia are already being felt across the globe. WSJ’s Greg Ip joins other experts to explain the significance of what has happened so far and how the conflict could change the global economy. Photo illustration: Alexander Hotz
Write to Alexander Osipovich at [email protected] and Caitlin Ostroff at [email protected]
Copyright © 2022 Dow Jones & Company, Inc. All rights reserved. 87990cbe856818d5eddac44c7b1cdeb8