BOFIT: The Russian financial market is looking for a new balance

BOFIT: The Russian financial market is looking for a new balance
Foreign investors are leaving the Russian capital markets. / bne IntelliNews
By Bank of Finland Institute for Economies in Transition (BOFIT) November 24, 2023

Foreign investors have left the Moscow stock market

The economic sanctions imposed as a result of the war of aggression started by Russia in March 2022 have changed the Russian financial market in many ways. One key change is the exit of foreign investors. Before the war, foreign investors (mainly large Western funds) accounted for about half of the trading on the Moscow stock exchange and about 20% of the government bond market. Sanctions imposed by Western countries and Russia's own measures to limit the sale of securities have practically expelled all foreign portfolio investors.

The consequences are visible in the market. Since there are hardly any large domestic institutional investors in Russia, the share of private individuals in trading on the Moscow Stock Exchange has been around 80% since the outbreak of the war. The volume of trading decreased sharply in spring 2022, and at the end of last year the average daily turnover was only about RUB30bn. This year, the good salary development and the gradual adaptation to the new reality have increased interest in stock investing. The average daily turnover has increased by about half compared to last year, but the volume of trading is still lower than the pre-war level. The exceptionally large share of private individuals makes trading difficult to predict.

Fewer changes in the bond market

Trading in the corporate and government bond market has been smaller than the stock market. In the bond market, domestic commercial banks are significant market participants; correspondingly, the share of foreign investors was smaller even before the war. About 9% of the banking sector's balance sheet is in government bonds and about 5% in other bonds. As a whole, the proportions have hardly changed during the war, but bank-specific information on the main items of the balance sheet is no longer available.

In total, about half of the ruble-denominated bonds in circulation are government debt, the other half is roughly equally divided between bonds of financial institutions and other companies. In the current year, fewer new government bonds have been issued than planned in the budget; instead, there have been plenty of companies and especially financial institutions. October saw an exceptional spike in trading as companies sought to benefit from the relatively favourable interest rate. The rise in interest rates will put a brake on new launches planned for the end of the year.

As a result of the sanctions, the share of domestic currency-denominated bonds has increased slightly, because according to the Russian government's order, companies' eurobonds must be exchanged for replacement Russian bonds by the end of the year. At the beginning of 2022, the amount of corporate Eurobonds was approximately $110bn; even after repayments and restructuring, the amount was still $52bn at the end of October. There are replacement bonds on the Moscow stock exchange worth about $16bn. Last year, a few companies also issued yuan-denominated bonds as an experiment, but this year the enthusiasm seems to have waned. At least not yet, by any measure, yuan bonds are not exactly substitutes for eurobonds.


The foreign exchange market has been shaped by both the exit of foreign players and the restrictions on capital movements imposed by Russia.

Before the war, the share of foreign investors and banks in foreign exchange trading was significant, but today the direct parties to the trade are almost exclusively domestic banks. In addition to export prices, the actions of the authorities affect the exchange rate clearly more than before. Although efforts are made to favour the use of the currencies of countries classified as friendly by Russia in many places, the ruble-dollar exchange rate is still a key indicator of economic development for many actors. The rapid weakening of the dollar exchange rate since the beginning of autumn has led to the tightening of restrictions on many capital movements. The course is affected by,for example, regulating the financial operations of foreign companies, foreign exchange repatriation orders, reporting obligations regarding foreign bank accounts and currency operations carried out by the central bank. However, the reasons for the depreciation of the ruble are not affected by these measures. The reason behind the deterioration is both distrust of the ruble as an investment target and the constant demand of import companies for Western currencies.

In the trading of the Moscow currency exchange, the share of the ruble-dollar pair has shrunk to about a third, while the share of the yuan has risen to almost 40%. The increase in the share is explained by the rapidly growing role of the yuan as an invoicing currency for foreign trade. The yuan's share in private individuals' currency transfers is less than 10%. The share of the euro in foreign exchange trading was 12% in October of this year, i.e. roughly the same as in January 2022. The share of the dollar in over-the-counter foreign exchange trading (in the interbank market) has shrunk only slightly and is still more than half of the trading volume.

In fear of sanctions, the obligation of companies and banks to report, for example, has been relaxed about its ownership relationships and financial results. In addition, along with Western investors, foreign analysts, credit rating agencies and auditors have also left the market. The pressure on reporting transparency and good governance that came with foreign investors has also now gone. On the other hand, the state's increased role as the owner of large companies and commercial banks and domestic payment and settlement systems guarantees that the market will continue to be able to mediate domestic financing between actors. However, as a result of the war, the Russian financial market is significantly more closed, smaller and riskier than before the war.


This article first appeared in the weekly comment from the Bank of Finland institute for Emerging Economies (BOFIT) here.