Whether you invest directly in Russia or not, you probably have exposure through mutual funds and exchange-traded funds (ETFs) that hold Russian companies. Even target-date funds used in employer-sponsored retirement plans often have a small position in Russia, if any.
The MOEX index rose on Thursday after the market reopened, but airlines led the way down as airspace restrictions imposed by the U.S. and others remain in place.
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History
The Russian stock market has a rich and complex history. Historically, investors have poured funds into the market for the country’s growth, as well as to diversify their portfolio. The Moscow Exchange is the main equities and bond trading platform in Russia, facilitating trades of equities, bonds, derivatives, foreign exchange, money markets and precious metals.
The MOEX Russia Index closed 33% lower, erasing $189 billion in shareholder wealth, as the West tightened sanctions against the country over its invasion of Ukraine. Investors may wonder if the rout marks the beginning of a long period of stagnation in the Russian economy.
But a deeper look at the historical data suggests this might not be the case. For example, between 1870 and 1914, Russian shares actually outperformed their American counterparts, according to a comparison that takes price changes into account as well as dividends paid. But that advantage was lost after the Revolution, when share prices fell to near zero and then remained at low levels until the late 1990s.
Growth
Although the MOEX index has fallen since the invasion of Ukraine, it is far from its lowest level. Its ruble-denominated counterpart, the MICEX, rose 23% last year as oil prices slumped, helping to boost profits of export firms whose revenues and spending are mainly denominated in foreign currencies. Similarly, the Finance sector outperformed other sub-indices last year.
However, the reopening of trading may not bring about the economic recovery that many investors hope for. A 7 March briefing from Capital Economics forecasts that foreign investment in Russia will plunge and companies will self-sanction themselves, with reputational concerns deterring firms from investing in their home market. It also notes that companies will struggle to raise funds abroad because of sanctions and may find it difficult to transfer debt to international markets. This could lead to a “death spiral”.
Regulation
The Moscow Exchange (MOEX) is a key Russian stock market, facilitating trades in equities, bonds, derivatives, foreign exchange, money markets and precious metals. MOEX also acts as the central securities depository for Russia and provides clearing services.
The MOEX reopened Thursday for limited trading, but with heavy restrictions that were designed to prevent a repeat of the stock market plunge that followed Moscow’s invasion of Ukraine and economic sanctions from the West. The MOEX index gained 4.4%, but some companies plunged. Airline Aeroflot sank 16.4%, for example.
Investors can access Russia’s securities markets through mutual funds, ETFs and ADRs. However, the high risks and volatility of the country’s stock market hinder the transformation of savings into investments and make transactions speculative rather than financing. Corruption and lack of transparency also pose barriers to fair business practices.
Despite these challenges, the nation has immense natural resources that can attract investors. The Russian economy is becoming increasingly diversified, but its dependence on oil leaves it vulnerable to commodity price fluctuations.
Trading
Stock market trading resumed in Russia on Thursday, a month after prices plunged and the Moscow exchange was shut down following Moscow’s invasion of Ukraine. The market reopened with heavy restrictions, including curbs that prevent foreign investors from selling and traders from shorting – betting prices will fall.
Russia’s shares are mostly owned by retail investors who have “little understanding and idea how to play the market,” Moscow broker Alexey Gordeyev said. That could cause a “wave of selling” when the country’s companies reopen trading in Russia and are instructed to revoke any share listings abroad, he added.
But it may be too early to say whether Russian markets will recoup their losses. In a study of six modern-day conflicts, investment company Research Affiliates found that stocks typically decline sharply in the two to three months following the start of a war. It then takes about six months for markets to recover. If Ukraine’s conflict escalates into a full-scale war, it would take much longer for the market to recover.
