Flash note. “Black Swan” on Thursday

The 24th February drawdown of the Russian equity market can be explained by the following factors:

  • Majority of the investors did not believe in the military invasion into Ukraine
  • Those who were selling Russian equities, bonds and rouble were in fear of material sanctions to take place (such as commodities export limitations) – measures similar to those introduced against Iran in 2012 and 2018. Back then, due to introduced sanctions Iran GDP fell by 7.4% in 2012 and by 12% overall during 2018-2019 period.

The drawdown cannot be explained by those sanctions that were introduced on Thursday during the day. By the strength they were similar to those actions introduced against Russia during 2014-2021. Even sanction against the banking sector (including actions against Sberbank and VTB) introduced later in the evening do not explain the drop in the market.

The imposed sanctions by the US and UK include:

  • Asset freezing of major Russian banks, including Sberbank and VTB. They are cut off from US dollar transactions. VTB has been designated as an SDN, institutions listed as SDN face the maximum restrictions. Sberbank has been added to the CAPTA list, prohibiting US correspondent account relationships starting on March 26. Sberbank was not included in the UK list of sanctioned banks, while VTB was
  • The US extends existing sovereign debt prohibitions to cover participation in the secondary market for bonds issued after March 1, 2022. The UK puts a ban on the Russian companies and the state on raising finance or borrowing money on the UK markets
  • The US stops export of high-tech items and oil refinery equipment. This covers items, such as electrical components and truck parts. The UK suspends licenses for dual use items which can be used for military purposes
  • The UK bans Russia’s national airline, Aeroflot, from the UK airspace
  • Freezing the assets and travel ban on several named individuals with links to the Kremlin
  • According to remarks made by Joe Biden, there is currently no consensus about cutting Russia off from the SWIFT network
  • The EU has yet to announce its next round of sanctions.

From the imposed sanctions we find the ones affecting Sber and VTB as the most significant. Inclusion of VTB in the SDN list will lead to the exclusion of the bank from the MSCI indices. We believe this can happen in the nearest future. The US government still retains an option of Sberbank inclusion into the SDN list.

Currently, the Central Bank of Russia provides support to the banks to ensure uninterrupted operation in the conditions of sanctions. The regulator provided relief on the revaluation of securities, and fixed the rate for the calculation of capital adequacy. It provides both rouble and USD liquidity to the sector.

 We believe that the probability of “Iran-style sanctions” is low (including blocking Russia from SWIFT payments system):

  • Russia is more integrated into the global economy than Iran. On its peak Iran’s export of oil was about 1mln b/d. Russia currently exports 5mln b/d. Additionally, Russia’s share of the European gas exports exceeds 40%. Russia’s share on the various global metal markets reaches circa 10%. This means that “Iran-style sanctions” will likely lead to a boomerang effect on Europe, the US and other countries. In our view this was the key factor stopping other countries from introducing material sanctions since 2014
  • From the other countries’ perspective military operation in Ukraine looks worse than the Crimea annexation. However, “Iran-style sanctions” still weren’t introduced
  • Russian gas export through Ukraine continues as usual, despite the military operation.

This means that after the military operation is over, the Russian equity market most likely will be at significantly higher levels than we observed on 24th February at the end of the trading session.

In our view, the major factor of  uncertainty now is the duration of military actions. During the course of military operation investors will likely continue to demonstrate nervousness and the high volatility on the market will likely continue.


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

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