Putin’s war makes Russian stocks the worst in the world with a grim outlook

(Bloomberg) — Vladimir Putin’s invasion of Ukraine sent Russian stocks plummeting in February. Nearly 10 months later, a recovery still seems a long way off after sanctions triggered an investor exodus and made them among the worst performing countries in the world.

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While the economy has largely been more resistant than expected to sanctions imposed by the US and its allies, the stock market paints a different picture.

Russian stocks have been excluded from global benchmarks and exchange-traded funds tracking the country’s stocks have been frozen or closed. Local investors have failed to rescue the domestic market from the war-induced slump, even though most foreigners are still prohibited from selling the local stocks they hold.

The sell-off in February led to a record-long market shutdown in Moscow. The dollar-denominated RTS index is down 35% this year, making it the worst performing benchmark of the 92 globally followed by Bloomberg in terms of local currency and the third worst in dollar terms. The MOEX Russia index, priced in rubles, is down 44% and is on track for its strongest annual decline since 2008. As the pressures of war mount, more losses may lie ahead.

“Russian stocks reflect bleak outlook as Western sanctions begin to weigh on the domestic economy,” said Piotr Matys, a senior currency analyst at InTouch Capital Markets Ltd. “The prospect of a global downturn in the coming quarters does not bode well for Russian oil, especially at a time when the European Union is fully committed to reducing its dependence on Russian raw materials.”

The EU and the G-7 have agreed to ban bloc companies from providing key services, including insurance, to ships carrying Russian crude if it is bought above a price cap of $60 a barrel. Russian oil supplies were also wracked by volatile crude oil prices, with benchmark Brent falling about 40% from its March high.

Lukoil PJSC and Gazprom PJSC, the heaviest members of the MOEX Index, are down 30% and 53% respectively this year. Meanwhile, the largest publicly traded lender, Sberbank of Russia PJSC, has plummeted 54% as international sanctions hit everything from Russia’s ability to access foreign reserves to the SWIFT bank messaging system.

Concern that Putin would expand the reservist call-up of the 300,000 men mobilized in September has also dampened local private investors’ confidence that they have money to work in the stock market.

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“In a sense, I find the underperformance of the Russian stock market surprising, as all the geopolitical risks are priced in at the start and the late sanctions, even the price cap, are not a game changer for Russian stocks,” said Iskander Lutsko, chief investment strategist at ITI Capital in Moscow. He attributes the market’s continued decline to “a lack of support from local institutional funds, while retail demand has been weakened by risks of mobilization and deposit outflows.”

Next year is unlikely to bring relief as war and capital controls continue, especially as a global recession curbs demand for raw materials and new sanctions put further strain on the Russian economy. On Thursday, EU member states agreed on a ninth package of sanctions against Russia, targeting new banks and officials, as well as the country’s access to drones.

“Without new capital inflows, limited by Western sanctions, Russian stocks are likely to underperform again next year,” said Matys of InTouch Capital Markets.

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