What caused the collapse of Russian stock market and what to do next?

What happened and what does Rosnano have to do here?

As one of the experts accurately noted, if the Russian market decides to fall, it does this devotedly. Many ask why we don’t consider Russian stocks in comments to our review of stock portfolios we publish. The answer is very simple: the Russian stock market is small, with insufficient liquidity, the country’s economy is under sanctions, any rumours and events cause investors’ panic.

To be honest, there is no desire to observe the devoted fall of the market. If we go back to the situation on 22 November, it is noteworthy that all 15 blue-chip companies at Moscow Exchange were at a loss. Rumours of significant problems with Rosnano public corporation’s debt settlement triggered the fall: at a meeting with creditors on 19 November, the accumulation of disproportionate debt and the necessity of correcting the company’s financial model were announced. According to the Central Bank’s requirement, Moscow Exchange stopped auctions in all Rosnano bond issues for over 71 billion rubles. Late last week, the bonds lost 20 pp in price, their profitability seriously rose (outstripped the growing risk level) out of fear of technical default. The auctions resumed on 22 November, the bonds fell to 80 rubles (minus 15,79%). Why is Rosnano’s debt restructuring dangerous? This will entail reconsidering the ratings of all companies with 100% public participation. Gazprom, VEB, GTLK, Aeroflot and some other issuers of the so-called segment of quasi-sovereign debt bonds will have difficulties.

Of course, the Russian Finance Ministry claimed that Rosnano’s debts would be repaid fully, they are provided with state guarantees. But this wasn’t enough anymore — the mass sale had begun. The index of government bonds RGBITR updated the minimum since April 2020 when the coronavirus pandemic facilitated the panic. At the auctions on Tuesday, 23 November, this index plunged by 7,13% since the beginning of the year. This is a very serious fall for federal loan bonds where an income is considered to be risk-free.

Rosnano’s problems alone didn’t manage to dramatically knock our markets down. There is a series of factors.

Foreign politics

Experts note that technically the Russian stock market was already ready for the correction of the so-called overbought state, which required some large-scale “unloading.” In the absence of political risks, correction scenarios could have been much softer. Since Russian stocks were bought out all autumn despite global economic problems and uncertainties related to the pandemic. Any declines in Moscow Exchange and RTS indexes were purchased by investors before serious decreases appeared.

Bloomberg’s news about the USA offering details about Russia’s plotted invasion to Ukraine from several sides — Crimea, Belarus — added fuel to the fire. Of course, it started to be rumoured about new sanctions on Russia. Foreign investors who started selling out stocks and bonds are the most fearful in such situations. The growth of turnovers in liquid blue-chip companies to 88 billion rubles, which is 1,7 times higher than the analogous Friday turnover the day before, is indirect evidence of what international investors sold.

Also, the news about the successful test of a Russian anti-satellite missile and Nord Stream 2 gas pipeline certification issues added nervousness.

Instability of the oil market

By mid-November, the oil market started to give foundation to start the sale of Russian companies’ shares: oil futures stopped updating long-term highs and reduced by $8 per barrel (some 10% fall). The further decrease in oil rates happened because of a decision of the USA, China, Japan, South Korea, India, Great Britain to sell oil from the countries’ strategic reserves. On the other hand, what will be spent from the reserves will have to be refilled later. The case is that now there is an attempt of balancing global demand and supply. Oil prices will keep rising with some break.

Consequences and forecasts

The mass sale in the stock market brought to the exchange of rubles for dollars, which had a negative impact on the ruble rate. We see this nowadays when the exchange rate rose to 75 rubles, not to mention banks’ exchange offices. The ruble rate saw its record low in 1,5 years just in October. The panic in the stock market instantaneously pushed the ruble down by 1,38 rubles against the dollar in one day on 22 November. Moreover, since late October, the ruble had already weakened by 5,32 rubles, or 7,7%. It is noteworthy that the calm foreign political situation is a guarantee of our national currency. The so-called country risks as they are. Therefore we don’t see a big growth of direct foreign investments in the country, just short-term speculative transactions.

What is more, we should understand that as a commodity country we have a currency that is less stable compared to key reserve currencies, and the trend for a weakening ruble in the long term will stay. This is inevitable. High oil prices cannot keep the ruble rate long-term. For instance, in September 2018 with comparable oil prices, the dollar rate was 57,7 rubles. In November 2014 with the same oil prices, the rate was 50,4 rubles. But if we have a look back at 2007, the rate was 25,7 rubles.

As for the further development of events in the stock market, consolidation around the current level with volatility above the average awaits us. The mid-term wave of sale of Russian stocks hasn’t yet ended. Investors should take a wait-and-see approach. The bravest can take advantage of falls and corrections to buy shares for an attractive price. Fundamentally, our stock market has strong features, and purchases at the current levels will provide a good result in 1-3 years. The pandemic and the higher incidence will make changes to both the world and the Russian economy’s development pace. Politics is still the main factor for the Russian stock market.