Who’s Buying Now That The Russian Stock Market Has Reopened?

Russia’s main stock index lost a third of its value on the day it invaded Ukraine. The currency plummeted when Western sanctions were announced, and Russians lined up at ATMs to withdraw cash. The Moscow Exchange has closed, with no word on when it will reopen.

A financial analyst was asked about investment strategy in a live television interview in Russia a week later. He responded by raising a glass and offering a solemn toast to the country’s stock market, which he referred to as a “dear comrade.”

Trading was partially restarted on Thursday, over a month after the market had shuttered.

The Russian stock market is in bad shape. Its unstable position reflects Russia’s overall financial predicament, with the country’s economy becoming increasingly isolated and its institutions unable to function as they once did.

Only 33 equities (out of hundreds) were authorized to trade when the market reopened, and they were heavily restricted. Foreign investors were unable to sell their interests, and short-selling was prohibited, preventing traders from wagering on dropping prices. The government had stated that it would spend up to $10 billion on stock purchases. Each day, trading was open for around four hours.

It was dubbed “a Potemkin market opening” by a White House adviser.

The market did not crash as many had predicted, thanks in part to the regulations. In the two days following the reopening, the benchmark index gained by little over 1%. However, the market, such as it is, is down 20% from the day before the battle and down more than 30% since the beginning of the year.

The stock market in Russia has never been as vital to the country’s economy as its counterparts in the United States, Europe, and others. Russia’s market is currently worth around $400 billion, or roughly the same as Walmart. Foreign investors possess the majority of the shares available for trading in Moscow, which is — or was — dominated by them.

Nonetheless, even if the number of retail investors in Russia is still modest, it is expanding. Jacob Grapengiesser, a partner at East Capital, a Swedish investment firm, was formerly stationed in Russia. He claimed that before the war, his wife’s younger coworkers asked her for investment recommendations after learning what he did for a job. Mr. Grapengiesser remarked, “That’s not something that would have happened even a few years ago.”

Investing in Russian stocks, on the other hand, is a quite different proposition presently. The Russian economy is being squeezed severely by sanctions, and Moscow’s retaliatory actions, such as restricting access to foreign money and boosting interest rates, are further limiting what corporations can do. Investors who screen their assets based on environmental, social, and governance principles, or E.S.G., are rethinking their exposure to all things Russian.

According to IHS Markit analysts, the Russian economy will contract by 11% this year, with inflation more than tripling to over 20%. According to their projections, the country will not fully recover its prewar size until the 2030s.

Russia’s public enterprises, which are often the largest and most worldwide in scope, are increasingly cut off from international markets, particularly if their owners are subject to Western sanctions. According to S&P Global Market Intelligence, the average public firm in Russia has a one-in-five chance of defaulting on its debt.

The value of Russian companies listed on foreign exchanges that continued to trade after the Moscow market closed has plummeted to virtually nothing. The fact that enterprises are valuable at home but useless abroad clearly encapsulates how completely the Russian market has been cut off from the rest of the world.

For some people, this is a golden chance. East Capital’s Mr. Grapengiesser said he’s been getting “three calls a day” from overseas hedge funds interested in buying his Russian stock at a deep discount. (The firm’s funds have hundreds of millions of dollars in Russian stocks.) He has no desire to sell, and he has no idea how he would go about doing so, given his holdings are locked as a foreign-owned fund.

Despite this, Mr. Grapengiesser remarked of the Moscow Exchange’s staged approach, “the market reopening has functioned above my expectations.” More people may decide to participate in the stock market now that Russian money is virtually stuck in the nation, he said.

Other countries have shut down their stock exchanges for lengthier periods of time than Russia. Greece’s market was shut down for five weeks in 2015 due to its debt crisis, and Egypt’s market was shut down for around eight weeks in 2011 due to the Arab Spring upheaval. Both markets dropped sharply when they reopened, but have since regained their footing and have started trading.

The four-month suspension of the New York Stock Exchange during World War I was the longest market shutdown in US history. According to William Silber, a finance professor at New York University’s Stern School of Business, market shutdowns tended to achieve their objectives.

Russia has made it impossible for foreign investors to sell rubles for dollars. The 1914 limits in New York were put in place “to prevent Europeans from selling their shares and cashing out their dollars for gold, and it worked,” according to Mr. Silber.

During the close in 1914, an unauthorized trading floor popped up in a central Manhattan building, allowing investors to trade. Mr. Grapengiesser stated that no secondary markets for Russian stocks have yet emerged. His company, along with others, has been discussing how to allow foreigners to trade with one another. He also said that certain foreign exchanges were discussing ways to make trading in Russian stocks easier.

The reopening of the Moscow Exchange is meaningful for Russia, even if it comes with major qualifiers, because a stock market typically acts as a shorthand for how well an economy is performing. However, as Russia’s economy grows further isolated, a full recovery with some semblance of normal trading appears to be a long way off. Building credibility with a larger group of investors is also important.

Timothy Ash, the head of emerging market investments at BlueBay Asset Management in London, stated, “It’s not really a true market.” “At the moment, Russian assets are untouchable,” he said, adding that “in the long run, even if Russia withdraws from Ukraine, I believe investors will remain cautious.”