How Putin Wrecked Russian Markets in Less Than Two Weeks by

© Reuters.

By Alessandro Albano – Over the past two years, the MOEX has been one of the best performing indices among emerging markets. This was the case until a month ago. After the start of Russian “special” military operations in Ukraine – as President Putin defined them – the Russian financial markets did not find a moment’s respite, prompting the central bank in Moscow to close the stock exchange to avoid a “flood of blood “financial seen the 40% lost in a single session.

With investors unable to access the country’s markets, the price hit historic lows against the dollar and other Western currencies, 10-year government bonds rose 400 basis points within days, and the cost of risk , as measured by CDS of debt, reached historic highs. Furthermore, interest rates have doubled to 20%.

The, an index that provides information on the development of Russian equities after the resumption of trading and replicates Russian certificates of deposit traded on the London Stock Exchange, lost 98% of its value after Russian ADRs listed on Paternoster Square (NYSE: ) all lost more than 90% on Wednesday.

A financial emergency forced the London Stock Exchange to suspend trading of all 27 Russian companies listed on Paternoster Square, forcing major Russian companies such as Sberbank (LON 🙂 and Gazprom (LON :).

Moscow towards default?

The huge cost of debt, the devaluation of the local currency and the freezing of foreign assets imposed by Western countries on the Russian central bank have increased the fears of traders about the sustainability of Russian debt.

These fears were also reinforced by the central bank’s decision not to pay interest on maturing bonds to foreign investors “in order to avoid massive sales of Russian securities, the withdrawal of funds from the Russian financial market and to support financial stability”.

According to Nick Eisinger, head of emerging market fixed income products at Vanguard AM, the move will lead to “a technical default” and for Moody’s it demonstrates Moscow’s inability “to repay its debt, even in the local market.”

Moody’s itself, in a combined action with Fitch Ratings, downgraded Russian debt by six notches to non-investment grade, or junk, citing questionable solvency as a cause for concern.

Who is investing?

In addition to all this and other sanctions imposed by the West (such as the blockade of some Russian banks by Swift), many companies have decided in recent days to sell their assets or their interests in Russian joint ventures, such as the giant British BP (LON :), Shell (AS 🙂 et Equinor (OL :),

But not only. Putin’s growing economic isolation is leading to a general exodus of Western businesses from the region. Groups like Ford (NYSE :), General Motors (NYSE :), Volkswagen (DE 🙂 and other big names in the industry have announced that they will stop exporting cars to Russia, followed by transport giants like the Danish company Maersk, who have decided not to send more containers to Russian territory.

Even at the technological level, things do not seem to improve. YouTube, Microsoft (NASDAQ :), Facebook (NASDAQ 🙂 and even China’s TikTok have said no to Moscow media propaganda on their platforms, while major banking groups like SociĂ©tĂ© GĂ©nĂ©rale (PA 🙂 have stopped dealing with the Russian market despite their exposure to it.

Profound consequences of the conflict

“The war in Ukraine is changing the geopolitical and economic landscape, with profound consequences for growth and global markets,” writes StĂ©phane Monier, Lombard Odier’s Chief Investment Officer, in a research note.

Sanctions by Western governments are increasingly isolating Russia due to the invasion which, according to Monier, “will bring Russia into recession, undermining its short- and long-term prospects”.

“The international operations of the Russian authorities have been scaled back. The central bank has doubled interest rates and has seen about half of its foreign reserves freeze. Our forecast is that the country will face a recession,” explained the director of the bank of Geneva.

On the other hand, Western sanctions have had a boomerang effect on commodity prices, with crude oil, wheat and gas reaching record highs. For Monier, these increases are “bound to increase, which will have the effect of increasing inflation and slowing growth in the rest of the world.”

In terms of the portfolio, he added, “with increased volatility and unclear geopolitics, we are actively managing risk exposures, reducing positions in European equities and convertible bonds, while increasing exposure to commodities in general.”

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