Propped Up By Putin, Russian Markets Creak Toward Full Reopening

(Bloomberg) — When Moscow stock traders return to their desks on Thursday morning, they’ll resume work in a market facing intense selling pressure while the state attempts to prop it up. It’s anyone’s guess which way things will go.

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Stocks, bonds and the ruble will trade simultaneously for the first time in nearly a month as Russia restarts trading in some local equities, ending its longest shutdown in modern history.

The market is buttressed by capital controls, the promise of billions of rubles of state asset purchases, and, most recently, a warning by President Vladimir Putin that foreign nations who buy Russia’s natural gas — but oppose its invasion of Ukraine — should get ready to pay in rubles.

The question is whether these measures will be enough to counteract strong selling pressure as investors flee the assets of one of the world’s most sanctioned countries. The last week that the market was open — during Russia’s invasion of Ukraine on Feb. 24 — it posted one of the worst daily plunges in equity market history.

Putin’s demand for ruble payments for natural gas may be weeks from implementation, but the possibility sparked twin spikes in the ruble of more than 8%, before the currency pared gains.

“This is a typical example of how to further isolate Russia in a way to improve the local market,” Iskander Lutsko, chief investment strategist at ITI Capital in Moscow, said by phone.

The currency’s wild swings are a reminder of how the market has become a through-the-looking glass version of what existed before the invasion. Even at the start of the year, investors were still toasting Russian assets as one of the best bets in emerging markets, despite the gathering geopolitical clouds.

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“The limits on capital flows and currency operations mean you can come up with any exchange rate, key rate or OFZ yield you like,” said Alexey Tretyakov, a portfolio manager at Aricapital in Moscow, when bond trading reopened on March 21.

Margin Calls, Gains

When Russian stocks begin trading, the state may try to do all it can to prevent another rout. The country dusted off its equities playbook from the 2008 financial collapse with a government pledge at the start of the month to spend the equivalent of $10 billion buying stocks when trading resumes.

Still, with as much as two thirds of the central bank’s foreign currency assets frozen internationally to punish Russia for the invasion, it’s unclear how it will be able to access and convert those funds to support the market.

READ MORE: Russian Stock Trading to Resume After Record Market Shutdown

Maxim Orlovsky, managing director of Renaissance Capital brokerage in Moscow, expects stocks to open in the same way local bonds, known as OFZs, did when their trading halt ended: They’ll fall until the state steps in to buy.

“We expect a repeat of the dynamic seen in the OFZ market’s first day of trading,” he said. “Margin calls at the start, followed by gains.”

For now, the central bank has forbidden short selling any of the 33 stocks with a primary listing in Russia that it has permitted to trade on Thursday. Yandex NV, TCS Group Holding Plc, Ozon Holdings Plc and other companies, whose main listing is abroad, won’t be restarting trading tomorrow.

Overseas investors are banned from exiting local equities and no foreigners can send their earnings on local securities abroad.

“The very limited re-opening will make little difference to foreigners who cannot sell and remain trapped, assuming they have not already marked down local holdings to zero,” said Hasnain Malik, a strategist at Tellimer in Dubai.

In the international bond market, Russia and its companies are pushing ahead with servicing their debt. But the eurobond market has become an unpredictable place and investors are keeping a close watch on their accounts for when — or if — their coupon payments arrive.

It’s a process that’s trained a spotlight on the clearing companies, correspondent banks, paying agents and custodians that normally handle the transfers away from the public eye.

The hurdles now include the freeze on Russia’s reserves, the fact that the world’s biggest settlement systems no longer handle most Russian assets, and the caution of U.S. banks as they seek assurances they won’t fall foul of sanctions on Russia’s billionaires.

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