“The calamity of Russia’s war in Ukraine has put an end to international financial investing in Russia,” Christopher Granville of TS Lombard tells Bloomberg. International investors owned an estimated $86bn in Russian equities as of the end of last year, but sanctions and a Russian ban on foreigners selling securities may leave billions of dollars trapped. Index compiler MSCI is now seeking feedback on whether to remove Russia from its stock and bond benchmarks.
The Moscow Exchange closed at the start of the week as regulators tried to head off a meltdown. The local Moex stock index is already down by more than a third this year. But while trading in Moscow was suspended, “many Russian companies are listed on overseas exchanges or trade there as depositary receipts”, says Evie Liu in Barron’s. “Those shares continued to trade on Monday, and it didn’t look pretty.”
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Heading for default
Foreign bond investors may also get burned, says Matt Wirz in The Wall Street Journal. Russian government bonds fell more than 50% at the start of the week because of fears that sanctions could make it impossible to receive interest payments. “Russian 5.25% dollar-denominated bonds due in 2047 were quoted around 30 cents on the dollar.” This is a sign that investors think a default is very likely.
That could be financially contagious. “Banks in France and Italy each own about $25bn of Russian government bonds, and Austrian banks held roughly $17.5bn of exposure,” Ray Attrill of National Australia Bank tells the Financial Times. Thus a default would “echo through the European banking system”.
Overseas arms of Russian banks may collapse (such as Sberbank Europe), but “these are probably too small to create systemic risks”, says Neil Shearing of Capital Economics. Nonetheless, the possibility of a bank run in Russia remains a serious risk.
Still, “it is hard to conceive a complete collapse of Russia’s economy as long as it can keep selling its oil at almost $100 a barrel”, says Jon Sindreu in The Wall Street Journal. That will bring a $20bn current account surplus each month. And the plunging rouble (see below) will depress domestic consumption, which could drive that surplus even higher, towards $30bn a month, says Sofya Donets of Renaissance Capital.
Investors head for safe havens
“The idea that geopolitical uncertainty raises the gold price isn’t mere folklore,” says Chris Dillow in Investors’ Chronicle. “Since 2006, a one standard deviation rise in uncertainty has been associated on average with a $230 per oz rise in gold.” So it’s no surprise that gold has now topped $1,900 per oz for the first time in 18 months.
Other safe-havens are also drawing more interest. Bond yields – which move inversely to prices – had been rising this year on expectations of tighter monetary policy, but markets are now pricing in slower interest rate rises. Yields on the benchmark US ten-year bond have fallen back to mid-January levels. Yields on Germany’s ten-year bund have fallen back below zero. Safe-haven currencies have also risen. The Swiss franc has hit its strongest level against the euro since 2015, while the US dollar is at its strongest since June 2020.
Cryptocurrencies are also emerging as a surprising safe-haven, says Ipek Ozkardeskaya of Swissquote. Bitcoin had fallen back earlier this year, but it has gained more than 12% against the dollar since the start of February. “The coin… is now the asset that Russians and Ukrainians rely on” as their access to the traditional financial system is closed off, with strong reported purchases “using roubles and hryvnias”. But for Western investors, the idea that cryptocurrencies may be used to evade sanctions raises new regulatory risks.
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