From Growth to Decline and Back: Examining the Russian Stock Market Before and During the Ukraine-Russia War
The Russian stock market has been on a roller coaster ride in recent years, impacted by a variety of factors such as geopolitical tensions, oil prices, and the COVID-19 pandemic. Despite these challenges, the market has shown resilience, with some stocks posting impressive gains. However, there are concerns about the sustainability of this growth, with some experts predicting a market correction in the near future.
Additionally, the ongoing political and economic tensions between Russia and the West continue to create uncertainty and risk for investors. In this article, we will explore the current state of the Russian stock market, examining its performance, trends, and potential risks and opportunities for investors.
Russian Stock Market Before the War with Ukraine
Before the Russia-Ukraine war, the Russian stock market had been showing signs of success and development. In 2021, the MOEX Russia Index, which tracks the performance of the largest and most liquid Russian companies, increased by over 20%, outperforming many other global stock markets. This growth was largely due to the recovery of the Russian economy from the COVID-19 pandemic and rising oil prices, which are major drivers of the Russian economy.
The most traded stocks on the Russian stock market were mainly in the energy, financial, and mining sectors. Gazprom, the world’s largest producer of natural gas, was consistently one of the most traded stocks due to its dominant market position and strong financial performance. Another popular stock was Sberbank, the largest bank in Russia, which benefited from a recovering economy and a growing number of retail clients.
Despite its success, the Russian stock market had a mixed reputation among investors. Concerns about corporate governance, transparency, and political risks, including sanctions imposed by Western countries, have made some investors hesitant to invest in Russian stocks. Nevertheless, the Russian government and regulators have implemented various measures to address these concerns, including improving market transparency and corporate governance standards.
In conclusion, before the Russia-Ukraine war, the Russian stock market was showing signs of success and development. The recovery of the Russian economy and rising oil prices were major drivers of the market’s growth, and stocks in the energy, financial, and mining sectors were among the most traded. However, concerns about corporate governance, transparency, and political risks still lingered, affecting the market’s reputation among investors.
Russian Stock Market During the War with Ukraine
The Russian stock market was performing well before the Ukraine-Russia war broke out in 2022. Before the war, it was characterized by increased foreign investment, solid economic growth, and growing domestic investment.
The most traded Russian stocks before the war were in the energy and financial sectors, with companies such as Lukoil, Gazprom, and Sberbank leading the way. These stocks accounted for approximately 40% of the market’s total value. The market was also experiencing record highs, with the Moex index reaching its peak in October 2021.
However, the situation changed dramatically after the war broke out. The invasion of Ukraine by Russian forces resulted in a sharp decline in the market, with the Moex index falling significantly in the following months. The imposition of Western sanctions further hurt the market, with many foreign investors leaving the market and non-residents shedding approximately Rbs170bn ($2.2bn) worth of Russian stocks.
Despite these challenges, the market began to show signs of recovery over the past seven months, with a rise in dollar terms of over 10% since the year’s low in October. This was due to domestic retail investors buying dividend-paying stocks, such as Lukoil, Gazprom, and Sberbank, as they had few other investment opportunities due to restrictions on foreign investment.
Despite the Western sanctions and the Russian government’s measures that prohibited most foreign traders from exiting their investments and limited the amount of money Russians could keep in foreign bank accounts, the market experienced a partial recovery. The recent rally in the Russian stock market shares some similarities with the unexpected strong performance of the Borsa Istanbul 100 in the previous year, where lower valuations and indirect capital controls led retail investors to return.
Despite the recent rally, it is unlikely that the market will reach the highs of October 2021 anytime soon. It is unlikely that foreigners, whose Russian holdings have been essentially frozen, will be permitted to sell their positions. Nonetheless, Russia’s economy has fared better than anticipated, despite official statistics not presenting the full picture. According to the Rosstat federal statistics service, Russia’s GDP contracted by 2.1% in 2022, which is considerably less than the 11.2% decline projected by the World Bank in April of last year.
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