- A strange calm seems to have settled in the Russian markets. But scratch below the surface, and almost everything has changed.
- The government is propping up the ruble and holding the Moscow stock market together, with foreign investors all but excluded.
- Iskander Lutsko of Moscow broker ITI Capital tells Insider what’s going on in “completely artificial” markets right now.
Nearly two months after the Russian invasion of Ukraine, a strange calm seems to have descended on the country’s financial markets.
The Russian ruble has now fully recovered from its dramatic drop in the days following the attack. The country’s stocks remain deep in negative territory for the year, but the dramatic sell-off seen in late February is a thing of the past.
However, take a look below the surface and you will see the strong arm of the Russian state holding the markets together. The government has introduced strict capital controls that have boosted the ruble and has prohibited foreign investors from disposing of domestic assets.
Iskander Lutsko is Chief Investment Strategist at ITI Capital, a major financial broker in Russia. He has worked in the financial markets for 15 years, including at Sberbank, Russia’s largest lender. He spoke to Insider this week about what’s really going on in Russia’s “completely artificial” markets right now.
Stocks don’t reflect ‘unfortunate reality’
Moscow’s Moex stock index is down about 40% so far this year, but is up about 9% since bottoming in late February.
Lutsko thinks his level should be considerably lower. “The Russian stock market does not reflect the unfortunate and true reality,” he said. “Simply because non-residents can’t sell.”
In 2021, foreigners owned about 80% of the tradable shares on the Moscow stock exchange, worth about $200 billion.
“Based on our estimates, at least $50 billion of equity exposure is still in fund balances,” Lutsko said. “Mostly US dedicated funds or European funds.”
A recent Moscow ruling that instructed Russian companies to revoke any share listings they hold abroad could trigger a sell-off, he said, once so-called warehouse receipts are repatriated.
“According to our estimates, there are at least 900 billion rubles [$11 billion] value of Russian stock foreign depository receipts that could be sold by local investors on Moex,” he said.
The lack of foreign players in the market has caused
dry up, making it difficult to buy and sell assets. Retail investors, who have “little understanding and idea of how to play the market”, now dominate trading, according to the Moscow-based broker.
The vultures come to play
In the bond market, the situation is even worse. Russia’s government and many of its biggest companies are on the verge of defaulting on their foreign debts after US sanctions blocked their access to the global financial system. The bonds of many large companies, such as Gazprom, have plunged.
But Lutsko said falling prices have attracted bargain hunters, hoping to benefit from a price rebound if Ukraine’s outlook clears. Although he avoids the term, these investors are often referred to as “vultures.”
“I know that many moderately sized hedge funds, and even many local brokers, are looking for opportunities to buy Russian Eurobonds,” he said.
ITI’s Guernsey entity has been facilitating these trades, buying bonds at 20-30% of face value. “There has been a lot of interest,” Lutsko said.
The ruble is ‘completely artificial’
The rapid rally in the Russian ruble has some analysts questioning whether Western sanctions are having the desired effect.
But Lutsko said that is not a reflection of the strength of the economy. The government has imposed strict capital controls that prevent rubles from leaving the country and has instructed exporters to convert 80% of their income into foreign currency.
“The ruble is in a completely artificial environment, regulated by the central bank that makes sure that
it’s still limited,” he said. “We have a bit of dissonance or dislocation in assets.”