“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.”
MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
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.
-
Family investment companies explained: how the ultra wealthy shield their money from the taxmanWealthy families are increasingly turning to family investment companies to keep more of their money away from HMRC – but what are these arrangements and how do they work?
-
How to boost your pension pot as 35% of UK over 50s face huge retirement savings gapOver 50s are facing a later life with little to no funds - but there are steps you can take now to boost your pot.
-
Yoshiaki Murakami: Japan’s original corporate raiderThe originator of Japanese activism, Yoshiaki Murakami, was disgraced by an insider-trading scandal in 2006. Now, he's back, shaking things up
-
Cash in on the vast growth potential of the companies electrifying the worldOpinion Martin Todd, portfolio manager, head of sustainable equities, Federated Hermes, highlights three electrification companies where he'd put his money
-
Galliford Try has firm foundations for strong growthBuilder Galliford Try has a finger in a wide range of pies, notably important work in the public sector
-
Card Factory is a stand-out small-cap going cheapIn a digital world, we still value the personal touch. That’s good news for Card Factory, whose unique business model is suited to weather all economic storms
-
8 of the best smallholdings for sale nowThe best smallholdings for sale – from a medieval cross-passage farmhouse in Taunton, Somerset, to a former farmhouse with an orchard in the Welsh Marches
-
How much gold does China have – and how to cash inChina's gold reserves are vastly understated, says Dominic Frisby. So hold gold, overbought or not
-
How to invest in undervalued gold minersThe surge in gold and other precious metals has transformed the economics of the companies that mine them. Investors should cash in, says Rupert Hargreaves
-
Debasing Wall Street's new debasement trade ideaThe debasement trade is a catchy and plausible idea, but there’s no sign that markets are alarmed, says Cris Sholto Heaton
