Flash note. Russian market sell-off in February 2022 vs December 2014

On 21 February, Russian equities dropped by 12% in USD terms. This has pushed their cumulative underperformance against other emerging market stocks to 34.8%. The last time we saw similar levels was at the peak of a crisis in December 2014; this lasted only for several days before a rebound began.

The reason for this unusually sharp drop was President Vladimir Putin’s recognition of Lugansk People’s Republic (LPR) and Donetsk People’s Republic (DPR) as independent states in the evening and anticipation of this action throughout the day. This came after the Russian Security Council backed the recognition. In a public address on TV, Putin announced that Russia accepted the sovereignty of the regions. He then signed decrees ordering the deployment of peacekeeping forces to the regions in Ukraine’s east.

In response, the US announced they would unveil new sanctions against Russia. It is not clear yet which measures will be implemented.

February 2022 vs December 2014

February 2022 December 2014
Impact of sanctions concerns Yes Yes
Deterioration of Russian market fundamentals No Yes
Geopolitical situation settled No Yes
Track record of Russian Central Bank on handling any panic Yes No
Risks to government finances No Yes

Sources: TKB Investment Partners, February 2022

Impact of sanctions concerns – similar, but with more uncertainty in 2014. In both cases, these concerns were the main driver of the sell-offs. The key difference is that in 2014, sanctions were a new phenomenon. So, the uncertainty was greater since there was no track record of US and EU reactions.

Russian market fundamentals – no deterioration in 2022. Oil prices dropping by 50% in the second half of 2014 added to uncertainty and had a negative impact on the Russian market. Now the global commodities growth trend is like to continue. Oil prices have risen by 26% since the start of this year.

Geopolitical situation is not resolved. By December 2014, the situation with Crimea was resolved. Similar further actions were unlikely. Now Russia has not achieved the progress it demanded on non-expansion of NATO. The risk that this will be a long-term conflict means that the market is unlikely to recover fully in the foreseeable future its current 35%+ underperformance against other EMs since mid November.

Proven track record of Russian Central Bank. Market panic in December 2014 marked the first test of the current team heading the CBR. They did well and calmed down the currency and other financial markets with conventional measures within just a couple of months. In other cases since then, the CBR acted decisively as well.

Risks to government finances – not material now. In 2014, the Russian federal budget had been based on a high oil price. Lower prices at the end of the year put the government’s finances at risk in 2014 and 2015. Since 2015, Russia has implemented strict spending controls, reducing expenditure in real terms. Since 2018, a new budget rule is in place. This means tax income from oil companies can be used as spending up to only USD 40-43 per barrel. The excess income goes to the National Wealth Fund.


Our base case scenario is that Russia will move army forces into LPR and DPR to restore peace. The ‘war discount’ that we currently see being priced in Russian equity and bond markets is likely to disappear once the situation has calmed down.

Such a scenario would lead to new sanctions from the US and EU and a deterioration of negotiations. A planned meeting with US Secretary of State Antony Blinken on 24 February will likely be cancelled.

We think it is unlikely that Russian troops will enter Ukrainian territory beyond the current borders of LPR and DPR. Putin has stated Russia intends to act as a peacemaker. He described in detail the poor conditions of people living in the regions and his aim to protect them. We believe he wants to not be seen as an aggressor.

We believe it is unlikely there will be Iran-style sanctions against Russia (banning Russia from exporting commodities or from using the SWIFT payments systems) given the ‘economic boomerang’ effect of such actions.

Putin appears likely to continue pushing the US on guarantees of the non-expansion of NATO.

We currently see two possible scenarios for the Russian equity market:

  • Weeks of volatility followed by a rebound; non-material sanctions such as those imposed in 2014-2021; some progress in talks between Russia and the US
  • Months of volatility with an uncertain outcome; a freeze of negotiations with more gloomy media headlines; sanctions on the financial sector (i.e. a ban on overseas buying of any Russian government bonds, a ban for some state banks’ to have accounts abroad) or a ban on exports of high-tech goods to Russia.


Authors: Vladimir Tsuprov, CIO, Egor Kiselev, Head of International Business & Investment Marketing, Marina Tsutskiridze, Investment Specialist

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