According to the monthly review of financial risks published by the Central Bank, in the last few months there has been an outflow of non-residents from friendly countries on the Russian stock market.
A bit of statistics
The massive sale of assets did not begin today. Already in July, non-residents actively got rid of Russian shares and bonds. For example, net sales of shares accounted for almost 75% of the total volume, which is almost 10.5 billion rubles, which is several times more than the June figure. The massive July exodus did not occur in the falling market, but on the contrary, on an actively growing one – the Moscow Exchange index in mid-summer rose by 9.9%, thereby updating the highs from a significant date on February 22, 2022. Industry indices also grew, retail and transport companies became the leaders in growth.
In August, the situation changed slightly, although the positive market dynamics remained. The Moscow Exchange index rose by 5%, and among industry indices, transport companies, IT and the banks and finance industry showed the largest growth. Non-residents began to buy shares of Russian companies, although not particularly actively – in the amount of about 0.2 billion rubles.
September brought some changes. The growth of the key rate, increased geopolitical tensions and news about the change in export duties led to the fact that the overall positive dynamics of the market was replaced by a correction. The Moscow Exchange index fell by 2.9%, most industry indices also decreased. This was the first monthly drop this year. At the same time, residents from friendly countries became the main sellers. They significantly increased the volume of sales of assets, both shares and OFL. The volume of shares sold, for example, became the largest since February 2022 and amounted to 32 billion rubles.
As for federal loan bonds, investments in them by non-residents from friendly countries are also actively declining. For example, in August, non-residents reduced the volume of investments in obligations of federal loans (OFL) by an average of 2.2%, which is 34 billion rubles. This is the minimum figure since January 2017. As of September 1, 2023, the share of residents in OFL issues decreased by 0.1% compared to August 1 – from 7.9% to 7.8%. This is the lowest figure in the last 10 years, it was less just once, on July 1, 2012, when the share of non-residents was about 6.5%.
In general, according to the Bank of Russia, the share of non-residents in the OFL market has been constantly declining since November 2022, and in January 2023 they sold off bonds at prices by 25-70% below nominal ones.
Causes and consequences of non-resident outflow
The share of non-residents in Russian assets has been falling for more than a year, and their main reason is sanctions and related problems in settlements. If earlier non-residents bought OFL, which were registered in foreign depositories, now this is simply impossible. In addition to the problem of discrepancy between Western and Russian asset ownership structures, the problem of withdrawal of funds is acute. In fact, the participation of non-resident investors is very much limited by barriers in the transfer of funds from Russia to foreign accounts. And so far there is no certainty that these barriers will be removed in the future.
At the moment, a very limited number of Russian banks have access to SWIFT and work with the dollar. If we add to this rapidly changing legislation, it becomes obvious that the trend of the “outcome” will continue in the future. Although the Bank of Russia is working to solve this problem, the unpredictability of the situation encourages non-resident investors to leave their risky assets, and it will most likely be difficult to attract them back.
As for the consequences of the outflow of non-residents from the Russian stock market, they may turn out to be multifaceted. The share of institutional investors is decreasing, and individuals who come to their place otherwise react to incoming news and have a different investment horizon. This changes the nature of the market, increases its volatility. The market concentrates more on dividend histories and primary offerings and is less willing to invest in fundamentally undervalued stocks or growth histories. He takes the risk bolder but has a greater penchant for group behavior. However, this can be considered as a certain improvement and normalization: it was hardly possible to recognize the previous situation as healthy, when three quarters of the market turnover was formed by non-residents. Therefore, the transfer of the center of gravity to Russian participants to a certain extent can be called recovery. However, it must be accompanied by subsequent growing up, learning some experience, but this cannot happen immediately – so let’s have patience.
By Mikhail Korolyuk, Head of the Trust Management Department of Solid Broker