Russian Stocks Plunge to Bottom of Global Market Amid Putin's War

In February, Vladimir Putin's invasion of Ukraine caused Russian equities to drop drastically. After the sanctions imposed in response to the invasion, investors began to flee the market, making Russian equities the worst performing in the world. Nearly 10 months later, a recovery still appears to be far away.

Despite the fact that the economy has been more resilient than anticipated in the face of sanctions imposed by the US and its allies, the stock market paints a different story.

Russian equities have been excluded from global indices, and ETFs that track the country's shares have been either frozen or shut down. Domestic investors have been unable to prevent the market from its decline due to the war, even though most foreign investors are still prohibited from selling the local stocks they possess.

The Moscow market experienced a record-long shutdown in February due to a selloff. The RTS Index, denominated in dollars, has dropped 35% in 2020, making it the worst performing benchmark among 92 tracked by Bloomberg in local currency terms and third-worst in dollars. The MOEX Russia Index, priced in rubles, has plummeted 44%, which is on track to be the most significant annual decrease since 2008. As the pressure of war increases, it is likely that more losses will occur.

Piotr Matys, a senior currency analyst at InTouch Capital Markets Ltd., noted that Russian stocks are showing a dismal outlook due to the impact of Western sanctions on the nation's economy. He added that the possibility of a worldwide recession in the coming months is not good news for Russian oil, especially with the European Union determined to reduce its dependence on Russian commodities.

The European Union and G-7 have come to an agreement to stop companies from their respective blocs from providing essential services such as insurance to vessels transporting Russian crude if it was bought for more than $60 per barrel. The Russian oil market has been greatly affected by the unsteady cost of crude, with Brent dropping around 40% from its peak in March.

Lukoil PJSC and Gazprom PJSC, the two most influential members of the MOEX Index, have both seen a decrease of 30% and 53% respectively in 2020. Sberbank of Russia PJSC, the largest listed lender, has experienced a 54% drop due to the international sanctions that have impacted Russia's access to foreign reserves and the SWIFT bank-messaging system.

Fears that Putin may expand the recruitment of reservists from the 300,000 individuals who were summoned in September has caused local retail investors to become less confident in their ability to invest in the stock market.

Recent speculation has arisen as to whether the new oil price cap could potentially impede Russia's war efforts. This is an interesting question to consider, as the oil industry is a major source of revenue for the country. It is possible that the cap could have a significant impact on the resources available to Russia for its military operations.

Iskander Lutsko, chief investment strategist at ITI Capital in Moscow, expressed his surprise at the underperformance of the Russian equity market. He believes that the geopolitical risks have already been taken into account and the sanctions, as well as the price cap, are not major factors. He attributes the continued decline to a lack of support from local institutional funds, as well as a decrease in retail demand due to the potential for mobilization and deposit outflows.

It appears that the coming year will not bring any respite from the war and capital restrictions, particularly if a worldwide economic downturn reduces the need for commodities and additional sanctions are imposed on the Russian economy. On Thursday, the EU member states agreed on a ninth set of sanctions on Russia, which will affect banks, officials, and the country's access to drones.

Matys from InTouch Capital Markets predicted that Russian stocks will likely not do well in the upcoming year due to the lack of new investments from the West, which have been restricted by sanctions.