Russia’s stock market is set to have a partial reopening Thursday, nearly a month after it shut down following the invasion of Ukraine.
The challenge for Moscow is that the resumption of trading could simply send Russian stocks back into free fall. On Feb. 24, the day when President Vladimir Putin began the assault on Ukraine, the main Russian stock index tumbled 33%. While the index regained a fraction of those losses on Feb. 25—its last day of trading—that was before Western sanctions hammered the ruble and sent the country into an economic crisis.
To limit the fallout, Moscow has turned to some heavy-handed 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 since a big chunk 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 Wednesday that it will allow trading of 33 shares out of 50 included in the benchmark stock index, the MOEX, on Thursday from 9:50 am to 2 pm Moscow time. Among the companies to be traded are Gazprom PJSC and Lukoil PJSC. Bets on the fall of a stock, known as short-selling, will be banned.
Under a policy announced by the central bank on Feb. 28, Russian brokerages aren’t allowed to let foreign clients sell securities. This will prevent foreigners from bolting for the exits as soon as the market reopens, which could be ruinous because of their outsize role in Russian stocks. International institutional investors held about three-quarters of the Russian market’s free float as of February 2020, according to Sberbank Investment Research.
That has raised concerns that the market will be skewed by the absence of foreign investors, who accounted for nearly half of equities trading volume at the Moscow Exchange in the first half of last year.
“There will be an illusion of a working, recovering Russian stock market, even though a huge class of players in the market—foreigners—won’t have the opportunity to sell,” Vladimir Kreyndel, CEO of ETF Consulting, a Moscow firm that advises issuers of exchange-traded funds.
Among the Western investors that held Russian stocks before the freeze were asset-management giants Vanguard Group and Fidelity International. Both firms have said they are reducing exposure to Russia.
Due to the freeze, foreign investors won’t have much to do when the stock market reopens.
But the plan 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, the person familiar with the matter said. In this arrangement, foreign investors could sell their shares or bonds, but would face restrictions on moving the proceeds out of Russia because of capital controls that Moscow has imposed since February, the person said.
Such a bifurcated market could result in oddities, such as the same stock having two different prices. That isn’t completely unprecedented. In China, there have long been discrepancies between shares on mainland exchanges in Shanghai and Shenzhen and those listed in Hong Kong.
It could also prevent further erosion of the ruble’s value. Russia’s currency has stabilized in recent sessions to trade near 104 rubles to the dollar, though it remains 22% weaker than before Russia invaded Ukraine.
“The biggest fear is that the central bank is under sanctions and they don’t 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 Exchange said Monday that it would allow for the settlement of trades that foreign investors had placed before Feb. 28 that were still being processed. Mr. Grapengiesser said his firm had trades still awaiting settlement from the start of the war that he expects to go through soon.
“It’s a natural step before opening the market. You need to take care of those unsettled 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 one trillion rubles, equivalent to $9.38 billion, worth of shares this year. Analysts also expect some Russian oil companies to prop up their share prices with buyback programs.
Local investors may buy stocks too. When Russia invaded Crimea, the MOEX fell almost 18% between mid-February and mid-March of 2014. But by the end of that year, it had rebounded more than 12% from that March low. The broad index has posted gains in all but one year since 2014. Stocks in unstable countries can also serve as hedges against inflation because locals expect companies can offset rising costs by charging higher prices.
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 wouldn’t rule out the possibility that the first day could end up with a modest increase.”
Russia is a minnow of a financial market by global terms. In December 2021, the total market capitalization of companies listed on the Moscow Exchange was about $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 Exchange the 20th largest stock exchange by market cap, just above Brazil’s B3 exchange, in the WFE’s ranking of global exchanges.
Until the war, Russia mostly attracted attention from specialist emerging-market funds and hedge funds, though it made up only a fraction of holdings for most globally minded investors.
said it would drop Russian stocks from its influential indexes that track emerging markets. Before the war, MSCI’s emerging market index had a 2.8% weighting for Russia. FTSE Russell has also announced plans to remove Russian stocks from its indexes. The moves will force investors whose holdings track the indexes to sell—when they can.
Wars have led to stock-market shutdowns before, although it is unusual. The New York Stock Exchange closed for about four months when World War I broke out in 1914, the longest closure in the NYSE’s history. The Beirut Stock Exchange reopened in 1996 after a nearly 13-year shutdown caused by Lebanon’s civil war.
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