Are Russian markets back? Hardly
There is a concerted effort underway by the authorities in Moscow to stabilise Russian financial markets and ease the feeling of panic which which came with the market collapse after the shock of the extreme sanctions initially imposed by the West following the invasion of Ukraine.
We are seeing;
* Deeply managed stock markets returning - no short selling allowed, limited stocks trading, guess more easily managed and guess for those Russians with some spare cash there is nothing much else to buy as hedge to inflation and currency collapse. There is even talk of the Russian state buying $10bn to underpin demand.
* Heavily managed FX market - 80% FX surrender requirement and cap/tax on FX purchases have helped. The push to force energy sales to be conducted in FX is aimed at forcing foreigners to transact in rubles if they want energy.
* A few weeks back the MOF gave up playing chicken by risking default on Eurobond payments. They had thought that creating doubt about payment would ensure that foreign bond holders would lobby their own governments to loosen sanctions on the CBR - E.g by allowing payment from blocked funds. That failed and they had to pay in the end from unblocked funds, drawing down their spare FX liquidity. The MOF realised that default would only hit a few Western bond holders who should not have been invested anyway but would hurt Russia for years to come as coming out of default would be difficult, and take years - see Venezuela. So the MOF blinked and paid.
On the latter though the MOF showed weakness which means OFAC has real leverage now when the general licence expires on May 25. OFAC can still force Russia into default with devastating effect. It should be busily signalling this fact.
In all the above, this is really just window dressing. Sanctions are proving really painful as Western financial sanctions are having the effect that International business just does not want to transact with Russia for fear of getting caught up in secondary sanctions. Even for energy we are seeing a sharp drop off in demand for Russian energy, and freight volumes in/around Russia drop off. Russian crude is now trading at a discount and on lower volume sales.
And what is new is the emergence of “self sanctions” where the power of social media is shaming international business with Russian operations to cease doing business in Russia - seen this in index exclusion, but also banks and big Western retail and manufacturing companies cutting their Russian operations. This is new and significant and shows the power of ESG. International business does not want the negative reputational hit for Russian business which is generally pretty peripheral to their global business.
Putting all this together Russian financial markets might stabilise in the short term, pending the next sanctions iteration, but few internationals are likely to want to trade or invest in Russia as Putin has made Russia like toxic waste.
This all means fewer capital inflows/more outflows from elites, higher borrowing costs, lower investment, lower growth, higher prices, higher unemployment and lower living standards with a huge brain drain leading to lower potential growth.
And let’s see if the West really has the balls to impose an energy embargo or perhaps a food for oil scheme which would be the final hammer blow to Putin’s economy.