Sanctions pressure knocks Russian stock markets and ruble out

Ruble under greatest pressure

The previous anti-record in Russian stock markets was on 22 November 2021. The Moscow Exchange index then fell below 3,900 points, while RTS Index reached 1,650 points. So the day ended with Moscow Exchange’s decrease by 3,58% and that of RTS by 5,55%. A fall comparable in speed and scale wasn’t seen since April 2020. And this seemed to be a collapse because the regular market volatility doesn’t presuppose such fluctuations.

However, the collapse of markets last week was catastrophic, on 24 February it was the biggest in history. The Moscow Exchange Index lost 3,2% and tested the bar of 1,700 points (that’s to say, the lowest figure since 2016), its dollar analogue RTS did 39,4%. At the same time, at midday, the indexes went down by 45-50%. Stocks of banks and the feedstock sector fell the most. The ruble turned out under the greatest pressure, and only interventions of the Central Bank helped to hold the rate within limits.

The markets partly played the fall back on Friday, 25 February, considering the sanctions imposed at that moment not severe enough. The MOEX Index grew by 20% to 2,470 points. Inter RAO (+31.16%), Transneft (+29%) and Novatek (+24,2%) were the growth leaders.

Given the fact that new sanctions were imposed additionally later, even the disconnection from the SWIFT system, Monday was expected to be a nervous day in stock markets and the Central Bank will literally burn its gold reserves to keep the exchange rate of the ruble and provide additional liquidity to banks. For instance, on 24 and 25 February, the CB injected some 3 trillion rubles into the financial system via a repo with banks. The task is to prevent the population and investors from panicking. Let’s see what happened in the markets on 24 and 25 February and what the Central Bank and Russian exchanges did.

Nerve-racking situation and capital outflow for exchanges

The Central Bank initiated currency interventions immediately after the markets opened on 24 February morning — it started to sell foreign currencies for rubles from its reserves (about $640 billion, but according to the latest news, it became clear that the Russian Central Bank was imposed sanctions and it wouldn’t be able to use the reserves in dollars and euros for its own needs, they were frozen). The last time the Central Bank resorted to interventions was in 2014 amid the ruble’s devaluation trying to hold the rate. But then they decided to refuse the idea of a currency corridor and let the ruble rate go. This is how we got a dollar for 70 rubles.

For reference, the amount of currency interventions in 2008 exceeded $200 billion, the peak currency sale was in December when $57,4 billion and €12,6 billion.

Approximately the same is awaiting us now: the CB will keep the rate for some time, then we will see another devaluation to 100-120 rubles per dollar. A nerve-recking situation with the ruble rate has been lasting since early January when it started to decrease. Due to this, the CB stopped buying currencies every day in favour of the Ministry of Finance within a budget ruble (when oil prices are above the level calculated in the budget, the CB buys currencies, when it is lower, it sells).

Many experts think that such a strong fall could have been avoided. The so-called exchange holidays (suspension of trading) should have been declared. It is hard to disagree because a lot of private and institutional investors who have carried serious losses have suffered. There is soft nationalisation without investors’ serious protection — public banks are buying dramatically cheapened assets of non-residents and Russian shareholders with the Central Bank’s money. It is a very good question for our CB.

Instead, the CB offered banks additional liquidity, started selling currencies at stock trading, expanded the Lombard list of securities banks can take out secured loans. Such injection of liquidity will go on this week. But the use of reserves will not solve the problem: the key rate will have to be raised to 20% to reduce the capital outflow from the country and if possible to keep a part of foreign investors in our bonds. If the CB's task is to stop buying currencies and withdrawal of money with market methods, the rate can increase more for a short period of time.

Foreign investors’ withdrawal from all Russian assets became one of the reasons for the market collapse. But a technical factor had a greater impact — a forced closure for private clients by brokers. This mainly affected those who relied on the market’s rebound. Russian brokers asked the CB to stop auctions. So only Moscow Exchange took some steps to reduce the volatility of financial instruments during trading — not to hold morning trading sessions in the stock market and trading in the derivatives market (a market of such derivatives of financial instruments as warrants, futures, forwards) that inexperienced private investors liked so much who completely forgot that it is a super-risky market.

A direct buyout of assets like in the case of currency interventions could seriously help the market. In 2008, a part of the National Wealth Fund equal to 175 billion rubles was spent to buy shares of Gazprom, Sberbank, Rosneft, Lukoil, VTB, Nornickel, Surgutneftegaz. VEB that spent 80% of the sum to buy the shares out and 20% to purchase bonds was the operator. Apparently, this time we will have to use all our safety cushions we have accumulated over these years. The scale of sanctions against our country is simply incomparable with the previous measures, and the state will become “the last hope creditor” for companies and banks. Also, it is necessary to stimulate the Non-Government Pension Fund to buy bonds, oblige the Finance Ministry to buy out sovereign bonds. All measures are good in a situation when there is supply but no demand in the market.

What’s next?

The Central Bank has a very tough task because there is no understanding how long this panic will last because not all sanctions haven’t been voiced and we will see a new round of panic moods. The ruble is extremely volatile amid expectations and fears, only non-market mechanisms can block such factors. The gold reserves we have accumulated are suitable only to support the currency, nothing else. Restrictions on some reserves will significantly reduce the period when the Central Bank can keep the ruble rate.

In this situation, the Russian authorities cannot help but take direct support measures for banks and companies. There will unlikely be introduced mandatory sale of the revenue in a currency for exporters, this can keep the ruble in the mid-term.

Of course, now Russian shares look very attractive from a perspective of growth potential. High dividend profitability of Russian stocks is a softening buffer zone for the possible fall in rates. But the risks and uncertainly are over the top.

The next two-three weeks will show where we will stop, the scale of the damage from sanctions will be definitely known, the rate will achieve a new equilibrium and a new stage in the life of the country’s economy will start.