RIMMER: Chernobyl of the stocks

RIMMER: Chernobyl of the stocks
Russia's stock markets are "open" again... If that is the right word. / wiki
By Julian Rimmer in London March 28, 2022

When plausible deniability was no longer an option, the Kremlin finally admitted that a nuclear disaster had taken place at Chernobyl in 1986 and did something about it. They buried the reactor in a giant steel and concrete sarcophagus, encasing the radioactive material within. They should do the same thing with the Russian stock market.


Micex chart

Show me the money

Jefferson wryly observed: ‘Money, not morality is the principal commerce of civilised nations.’ It came as no surprise then, amid the astonishing crash of Russian stocks when Putin’s ‘Special Military Operation’ started, to note opportunists looking to take advantage of large and profitable companies trading as penny stocks. If you’ve been around long enough to witness Gazprom’s market cap trading in excess of $300bn back in 2008, for example, the chance to snaffle shares with its valuation below $250mn is irresistible to many.

Resist they should, though.

Setting ethical questions aside for a moment, (or forever, if you prefer) punters (there’s no other word for them) should proceed with caution. This is a gift horse to be stared at squarely in the mouth. Even if the amoral investor (forgive the tautology) were able to circumvent restrictions and find some way to take Russian equity exposure, there are myriad reasons why they shouldn’t. Buffett reckons the stock market was a means of transferring money from the active to the patient. He may be the Sage of Omaha but he’s wrong about that.

Strategists anticipating the demise of Russia’s stock market have had their beards singed before: its death has been foretold many times. On each occasion of the sovereign default of 1998, the Global Financial Crisis of 2008 and the Crimean annexation in 2014, the Russian exchange was disorderly to the point of dysfunctional. Turbulent trading only abated during the frequent suspension of the market and ruble volatility was only subdued by the immolation of reserves and central bank restrictions on exchange.

Every time, the international investment community declared the asset class uninvestible and bolted. Before long, though, compelled by comically cheap valuations, juicy dividend yields and a short memory office, the same investors returned and powerful recovery rallies began.

This time it is different

This time, though, it’s the exit that is bolted and investors can’t escape. A fund manager I spoke to yesterday estimated there is perhaps $80bn of foreign money trapped in Russian stocks and he was doubtful any of this would be returned for several years. With no trading price available, he was obliged to mark all his Russian holdings down to zero. There will be some uncomfortable quarter-end conversations to be had as the new practicalities of Russian share ownership are explained fully to clients. Many of them will end with the question, ‘What do you mean, I can’t get my money out?’ dangling.

It’s not the much-fabled exclusion from SWIFT which has scuppered the repatriation of cash but rather the sanctions imposed on the Russian Central bank. Even if internationals were able to liquidate positions – presently forbidden by Russian financial authorities – the ruble proceeds cannot be exchanged for hard currency at the sanctioned central bank.

Even in the most optimistic of scenarios where the conflict in Ukraine is brought to a complete and immediate halt and Putin’s regime is replaced overnight by cuddly, pro-Western, pro-wokey, liberal democrats, these punitive sanctions are not rolling off any time soon. The crippling severity of the measures clearly took the Kremlin – and fund managers – by surprise.

Like most cliches, ‘Buy when the cannons are firing and sell when the trumpets are blowing’ doesn’t withstand much scrutiny and those looking to exploit Russian share prices that were unimaginable barely a month ago should take a moment to consider the risk that the asset class really is done this time.

Here’s why.

‘It’ll be all over by Christmas’

Wars have a habit of lasting longer than people expect at the time. The ‘It will all be over by Christmas’ mentality is generally misplaced, as was Vladdy The Baddy’s expectation that Kyiv could be taken over a long weekend. Blitzkrieg has been substituted by a war of attrition. Bringing the Russian economy to a standstill will take time and will resemble Hemingway’s state of inebriation: ‘very slowly at first, then all at once’. Sanctions will be ratcheted up several notches in response to mounting evidence of war crimes.

There is no evidence yet that resistance to Putin is building. Pollsters Levada registered an uptick in Putin’s approval ratings (yes, you read that correctly) from 65% in Dec to 71% in Feb as the invasion began. This was even before his Nuremberg rally in a fifteen-grand Loro Piana overcoat and platform shoes. Putin has dominated – and scorched the political landscape for so long, contenders or rivals are not apparent. If a palace coup ever materialises, it will make Yusopov’s assassination of Rasputin’s seem clinical. Chaos is likely.

Even if Putin is overthrown, don’t expect some flower of liberty to blossom. The siloviki and security service infrastructure is too well-established to deracinate. Someone similar, probably worse, will step into Putin’s (platform) shoes.

Pick any card from the pack

Complicated defaults are looming among Russian corporates as central bank sanctions prevent coupon payments. A wave of bankruptcies, potentially leading to nationalisations, seems inevitable. A credit squeeze will render the economy sclerotic.

Russian retail investors opened brokerage accounts in their millions during the pandemic. Now they need to sell what they bought to subsidise living costs, with the Russian economy forecast to contract 10% in 2022 and unemployment to surge. The exit of foreign businesses, which took Russia a quarter of a century to attract, is irreversible within the next five years. Index weightings have been erased, creating the mother of all overhangs from passive investors as and when they can sell. They are not allowed to buy.

We’ve been here before

By the standards of previous market crashes, this RTS Index degringolade is not even so severe. It’s halved since the October high, whereas it shipped 93% peak to trough after the default of 98, 80% after the GFC and 46% after Crimea. The Russian stock exchange will be a dustbowl. Optically at least, maybe Russian shares look cheap if you could find an analyst prepared to make a forecast – but there is just so much political, social, economic and military uncertainty, I wouldn’t trust one who did. Nor would I count on internationals receiving dividend streams.

Caveat emptor: the 2022 vintage of the Russian crisis is not a ‘buy the dip’ event. There’s no phoenix rising from these ashes.