Sanctions crisis led to the Russian equity market drop by 24% YTD in USD terms and 38% in rouble terms, as of end of May 2022. Rouble gained 23% YTD against the dollar on the back of capital control, imbalance in export/import, and requirements to exporters to convert their FX revenue into roubles. Foreign investors were prohibited to sell their rouble holdings, and residents were prohibited to move more than USD 50 000 out of Russia. Exporters were obliged to sell 80% of foreign currency revenues. In May the requirement was reduced to 50%.
The impact of sanctions on the Russian equity market
In order to support the Russian equity market, the Central Bank temporary banned foreign investors from trading Russian stocks. Currently only resident investors are allowed to trade Russian securities. However, the Moscow Exchange has developed a plan on how to execute trades for non-residents. It is expected that there will be two separate markets for residents and for non-residents. Non-residents from “unfriendly” countries will only be able to trade with each other. All proceeds from trades or dividends for non-residents will be put on a special S-accounts, with no option to withdraw capital from the country. The Ministry of Finance A. Siluanov indicated that the ban on the withdrawal of funds from the country for non-residents will remain in place until Russia’s international reserves are unfrozen.
The top performers on the Russian equity market are exporters that got relatively less hit by sanctions, have less problems with logistic, and benefited from the hike in commodities prices. For example, fertilizers producer Phosagro gained around 45% YTD in USD terms as at the end of May.
From the end of February 2022 the Western countries imposed five packages of sanctions on Russia targeting wealthy individuals, banks, businesses and state-owned enterprises. Among those sanctions, the most significant that have material effect are:
- Freezing of Russian international reserves. Access to around 50% of the reserves, was blocked, which is roughly USD 300 bn.
- SWIFT ban on several major banks. SWIFT exclusion hit some of Russian banks but not the whole financial system
- Inclusion of several Russian companies to the SDN list
- A series of trade restrictions, including coal embargo by the EU and crude oil imports ban by the US. Coal ban comes into force in August 2022.
In overall, Russian economy shows remarkable resilience and faces sanctions relatively stronger than it was expected. In the end of February, the CBR had to hike the key rate from 9.5% to 20% to offset increased risk of rouble depreciation and inflation. However, already in April it started sharp cut the rate, by 300bp each month. In May the key rate reached 11%. The CBR’s governor Elvira Nabiullina hinted that further cut of the key rate was possible at the upcoming meetings. The CBR also updated its forecast of the year end key rate to 7.25-7.5% in its optimistic scenario. This was mainly due to strengthening rouble and inflation slowing faster than expected.
Russian inflation slowed to 17.1% in May for the first time since March 2022. Peak inflation was recorded in April at 17.8% YoY. The CBR expects annual inflation to be at 14%–17% by the end of 2022, yet in April forecast suggested year-end inflation at 18%-23%.
The CBR’s key rate and Russian YoY inflation
We see several factors that may keep inflation under control by the end of 2022.
- Falling imports. Russian imports fell sharply in recent months due to problems in supply chains and arrangement of payments as major Russian banks are sanctioned. The Russian authorities temporarily suspended publication of import-export data starting from April 2022. However, several researches claim the Russian import has fallen by 50% YoY in April. And Russian exports remain at a high level in dollar terms, despite the restriction on the export of some commodities.
This has contributed to the growth of trade surplus. In January-May the surplus increased by 3.5 times compared to the same period last year, and amounted to USD 110 bn.
- Cut of expenditures by population due to high level of uncertainty. According Synergy University’s research, around 55% of Russians plan to cut spending on travel, 32% – on entertaining events, around 28%-on restaurants and cafes, around 10% of population plan to cut spending on food.
- Trade sanctions. Export restrictions led to an increase in supply in the domestic market of some types of goods. This leads to prices decline on local market.
Another notable counter measure taken by President Vladimir Putin was a requirement to pay for gas in roubles. Now “unfriendly” countries are able to pay for gas only in roubles by special “K” accounts at Gazprombank. Money transferred by “unfriendly” countries in euros to Gazprombank are then converted into roubles on the Moscow Exchange. Yet, the fact that gas is paid in roubles does not change the balance of payments. The balance of supply and demand in the foreign exchange market over the long term will also not be changed fundamentally. The advantage of this step is that with rouble payments, Russian government eliminates the risk that the payment for gas will get frozen.
According to the Russian government, about RUB 8 trillion (USD 156 bn) were allocated to support the Russian economy. The Ministry of Finance A. Siluanov projected a budget deficit of RUB 1.6 trillion (USD 31 bn) this year, which, in his words, will be compensated from the National Wealth Fund. According to Siluanov, the final amount of the budget deficit will depend on the government’s anti-crisis response measures that may still be needed for the Russian economy.
 Countries that have imposed sanctions on Russian citizens and companies
Authors: Egor Kiselev, Head of International Business & Investment Marketing, Marina Tsutskiridze, Investment Specialist.