Russia’s stock market has risen to its highest level in over a year. Despite the ongoing war in Ukraine, the MOEX Index has been on a tear over the past 6 months, expanding 50% since its yearly lows in October.
The rise comes amid the onslaught of sanctions imposed by the West on the Russian economy. The Russian administration has responded by instilling strict controls on the movement of money, most notably by prohibiting foreign investors from exiting investments, and limiting the cash that Russians can hold in foreign bank accounts.
The stock market has been artificially supported as a result, with few options for investors to park their money.
For investors, however, there is another elephant in the room: the ruble, Russia’s currency. One of the goals of the West’s sanctions was the cripple the ruble, but it has not gone quite to plan (I did a piece on this last year).
After immediately tanking 40% when Russian forces invaded Ukraine last February, the ruble bounced back remarkably, surging 70% – it was actually the best-performing currency in the world last March.
It has fallen off since against the dollar, but is only 6% off its pre-invasion levels, and this comes amid a year of immense dollar strength, with many other currencies down far more than that against the greenback.
As a result of these unprecedented sanctions, the ruble almost is immediately reduced to rubble
Joe Biden, March 26th 2022
Three months after that Biden quote, the ruble hit a 7-year high.
A couple of factors have buoyed the ruble’s performance. Firstly, rising energy prices were a boon given the importance of Russia’s natural gas exports (and Europe’s reliance on them). The US also showed mercy on debt repayments, allowing financial intermediaries to process payments from Russia, meaning Russia avoided selling rubles for dollars to cover interest payments.
But the real story is manipulation. Putin prioritised propping up the ruble, and it has largely worked. 80% of the money made abroad by Russian businesses is required to be swapped into rubles, regardless of the exchange rate, while the Russian central bank raised rates to 20% on the same day that Russia invaded last February, encouraging Russians to keep faith with the ruble.
For foreign investors, flipping the Russian stock market to dollars then looks like the below – a large drop post-invasion before an almighty surge back, and then a gradual decline as the dollar strengthened vs the ruble while the stock market ( in rubles) bounced.
Obviously, this is all far from natural. Not only was the ruble manipulated, but Russian brokers have been prohibited from selling securities owned by foreign investors. There simply aren’t many places investors can park cash; their money is more or less trapped.
It makes these paper gains look a little less palatable. However, given the fact that Russia is literally at war, it remains remarkable that the market has been propped up to this extent. I charted the Russian performance in USD against the S&P 500, and while it has done worse, it hasn’t done that much worse, given the circumstances.
The pattern reminded me of the Nasdaq, so I added the tech-heavy index to the chart below. As you can see, the Russian stock market has, at least on paper, traded like a levered bet on the Nasdaq, now down 31% in USD compared to the start of 2022, while the Nasdaq is down 23%. >
Going forward, the tight restrictions in place by the Kremlin won’t change anytime soon. While investors may be relieved that the stock market hasn’t totally collapsed since the invasion, the reality is definitely worse than what the charts convey.
It is extremely challenging to pull money from the exchange and convert it into dollars, especially as a foreign investor. By definition, therefore, these are not real returns. Make no mistake, this has been a disaster economically for Russian investors, and if restrictions ever did lift, the outflow of capital would be immense.
It will all depend on what happens in Ukraine, but for now, as the war rages on, these are just make-believe numbers on a chart.
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