Russian stock exchange partially reopens on Thursday

The Russian stock market is set to partially reopen on Thursday, almost a month after it was shut down following the invasion of Ukraine.

The challenge for Moscow is that resuming trading could simply send Russian stocks into free fall again. On February 24, the day President Vladimir Putin launched the attack on Ukraine, Russia’s main stock index fell 33%. While the index recouped a fraction of those losses on February 25 – its last day of trading – that was before Western sanctions hit the ruble and plunged the country into an economic crisis.

To limit the impact, Moscow has resorted to hard-line politics. It prevented foreign investors from selling local stocks — a move some market participants saw as retaliation for the Western freeze on assets by Russia’s central bank, given that a large part of the Russian market is owned by foreigners. The Russian government ordered its sovereign wealth fund to buy billions of dollars worth of stocks.

The Russian stock market could end up looking very different than before, with plans to split it into separate markets for foreign and local investors, according to a person familiar with the matter.

The Central Bank of Russia announced on Wednesday that it will allow trading in 33 out of 50 stocks included in the MOEX benchmark stock index on Thursday from 9:50 a.m. to 2:00 p.m. Moscow time. Companies to be traded include Gazprom PJSC and Lukoil PJSC. Betting on the fall of a share, so-called short selling, is prohibited.

The headquarters of the Central Bank of Russia, which has announced that the country’s financial markets will gradually reopen.


Photo:

Andrey Rudakov/Bloomberg News

According to a directive announced by the central bank on Feb. 28, Russian brokerage firms are barred from letting foreign clients sell securities. This will prevent foreigners from rushing to the exits once the market reopens, which could be ruinous given their outsized role in Russian equities. According to Sberbank Investment Research, international institutional investors held about three quarters of the free float of the Russian market in February 2020.

This has raised concerns that the market is being distorted by the lack of foreign investors, who accounted for nearly half of the stock trading volume on the Moscow Stock Exchange in the first half of last year.

“There will be an illusion of a functioning, recovering Russian stock market, although a huge class of players in the market – foreigners – will not have the opportunity to sell,” said Vladimir Kreyndel, CEO of ETF Consulting, a Moscow firm that advises issuers of Exchange Traded Funds.

Western investors holding Russian stocks before the freeze included wealth management giants Vanguard Group and Fidelity International. Both companies have announced that they will reduce their exposure to Russia.

Due to the freeze, foreign investors won’t have much to do when the stock market reopens.

But the plan, being examined by Russian officials – which is still at the discussion stage – would effectively split the country’s securities market in two, with one market for foreigners and another for local investors, the person familiar with the matter said. Under the arrangement, foreign investors could sell their stocks or bonds but would face restrictions on moving the proceeds out of Russia due to capital controls Moscow has imposed since February, the person said.

Such a divided market could lead to oddities such as: B. that the same stock has two different prices. This is not entirely unprecedented. In China, there has long been a discrepancy between stocks listed on the mainland Shanghai and Shenzhen stock exchanges and those listed in Hong Kong.

It could also prevent further erosion of the ruble’s value. Russia’s currency has stabilized in recent trading sessions, trading near 104 rubles per dollar, although it remains 22% weaker than before Russia invaded Ukraine.

“The biggest fear is that the central bank is under sanctions and doesn’t want foreign investors to sell their shares and take the ruble and buy hard currencies,” said Jacob Grapengiesser, head of Eastern Europe at emerging markets fund manager East Capital.

The Moscow Stock Exchange said on Monday it would allow settlement of trades placed by foreign investors before February 28 that were still being processed. Mr. Grapengiesser said his firm has had deals awaiting settlement since the beginning of the war and he expects them to be completed soon.

“This is a natural step before the market opens. You need to take care of those unsettled trades,” he said. “It’s going slowly”

Shortly after the war began, Russia’s prime minister ordered the country’s National Wealth Fund to buy up to a trillion rubles worth of stocks that year, the equivalent of $9.38 billion. Analysts also expect some Russian oil companies to support share prices with buyback programs.

Local investors can also buy shares. When Russia invaded Crimea, the MOEX fell almost 18% between mid-February and mid-March 2014. By the end of the year, however, it had recovered more than 12% from its March low. The broad index has posted gains for all but a year since 2014. Stocks in unstable countries can also act as a hedge against inflation, as locals expect companies to be able to offset rising costs with higher prices.

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A board showing the exchange rates of the US dollar and the euro against the Russian ruble in Moscow over the past month. Western sanctions have since hurt the ruble.


Photo:

Dimitar Dilkoff/Agence France-Presse/Getty Images

Government efforts have led some to be cautiously optimistic about reopening. “Initially, I think there will be a moderate correction,” said Natalia Smirnova, a financial adviser in Moscow. “But I wouldn’t rule out that the first day could end with a modest increase.”

From a global perspective, Russia is a tiny financial market. As of December 2021, the total market capitalization of companies listed on the Moscow Stock Exchange, according to the World Federation of Exchanges, was approximately $842 billion, which is nearly 90% of Tesla Inc.’s current value.

This makes the Moscow Stock Exchange the 20th largest stock exchange by market capitalization, just above Brazil’s B3 Stock Exchange, in the WFE ranking of global stock exchanges.

Until the war, Russia attracted the attention of specialized emerging market funds and hedge funds, although it represented only a fraction of the holdings of most global investors.

MSCI Inc.

said it would remove Russian stocks from its influential indexes that track emerging markets. Before the war, the MSCI Emerging Markets Index had a 2.8% weighting for Russia. FTSE Russell has also announced plans to remove Russian stocks from its indexes. The moves will force investors whose holdings the indices track to sell — if they can.

Wars have caused stock market closures before, although this is unusual. The New York Stock Exchange was closed for about four months when World War I broke out in 1914, the longest closure in NYSE history. The Beirut Stock Exchange reopened in 1996 after a nearly 13-year closure caused by Lebanon’s civil war.

The consequences of the tough economic sanctions against Russia are already being felt around the world. WSJ’s Greg Ip joins other experts in explaining the significance of what has happened so far and how the conflict could transform the global economy. Photo illustration: Alexander Hotz

Write to Alexander Osipovich at alexander.osipovich@wsj.com and Caitlin Ostroff at caitlin.ostroff@wsj.com

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