At a time when Russian investors are struggling to solve equations with multiple unknowns, it is very important to develop some logic and consistency of interaction between finance and investment. It is a known fact that the Soviet economy was inefficient largely due to the lack of a free market for goods and services naturally regulated by supply and demand. The state planning committee, Gosplan, played a dual role as a demand generator (customer) and an investor at the same time.
So the first important conclusion is that, with all the dramatic changes taking place, exchange trading is crucial for the Russian economy. Without it, it risks sliding back into the time when a business could only succeed through proximity to the distribution system; that was one of the reasons why the USSR collapsed.
However, Russia has some specific features. For a long time, we have been trying to replicate Western models of the “new economy,” dominated by sophisticated intangible exchange instruments called derivatives, such as options and futures. In our reality, commodities must offer the biggest capitalization and trade volume, especially considering the modern specifics of foreign trade. The nominated currency of these commodities on the exchange must correspond to the amount of actual transactions rather than their reserve capacity (which is essentially just a status but not a quality). Unfortunately, in this emerging model, the stock market will be secondary and subordinate to the commodity market. But is it bad news after all?
I would not confidently state that this shift in the Russian exchange’s specialization will fully edge out dollar and euro to replace them with yuan. There is speculation about introducing a common currency for the BRICS countries. Should this initiative fail to show enough success, it is possible that digital ruble may be able to resolve the currency issues in Russia.
At any rate, I believe that domination of the commodity component as a basis of exchange trade will benefit the Russian stock market as well, which should eventually attract foreign investors.
Considering how the situation on foreign stock markets has developed in the past years, I can’t bring myself to call it healthy. For example, right now dollar is strengthening by leaps and bounds against many world currencies (except ruble) although the inflation in the United States is approaching 10% per annum. This means that next year, the $100 you invested will be worth just over $90. And yet, the growing dollar exchange rate means that investors are currently getting rid of other, seemingly more profitable investments, to buy dollars. This is due to the changing course of the Federal Reserve System’s monetary policy. There are simply no other reasons. However, this man-created situation is increasing the risk of a stock crisis every day, which does not benefit anybody.
But it has not always been this way. In the late 20th century, the changes in stock prices were primarily caused by changes in the fundamental indicators of the stocks themselves, so the market was more effective from investors’ point of view. If Russia manages to boost the effectiveness of its isolated (for now) market by prioritizing domestic commodities that are less subject to artificial pricing, the Russian stock market will become a magnet for global investors looking for logic and stability for their capital, even amid the sanctions, just like the strengthening ruble unexpectedly drew everybody’s attention. One secondary issue remains to be addressed: developing tools to make it possible for all categories of investors to participate.
The most important goal for stock market investors is to achieve profit that would be higher than the predicted inflation. Unfortunately, due to the transition period following the new sanctions imposed on the huge Russian export sector and the core banks in terms of the capitalization of our indices, we have to be particularly careful when it comes to stocks of similar companies whose financial flows will be subject to significant changes in the next months.
The focus is on publicly traded companies that earn profits exclusively in Russia – and their number is not so high. As concerns retailers such as Magnit and M.Video, we should understand that the population’s inflation-triggered lowering incomes reduce their cost-effectiveness. OZON is better positioned thanks to being a major discount store although its policies have not allowed it to avoid operating at a loss.
Companies of the corporate segment whose profits are independent from the sanctions or retail customers’ purchasing power, deserve particular attention. One example is Positive Technologies, whose revenues have been growing for the past few years and will most likely continue to grow further, due to the high demand for technology, market changes and relevance of cyber security. The company is committed to its promise to continue paying dividends with a predicted profitability of around 1.5%.
Another successful example of entering the stock market is Segezha Group’s debut. The company opted against a mirror IPO in New York or London, thus making its operation amid the sanctions significantly easier. The business focuses on industrial paperboard packaging that is required in many sectors, which for this reason seems to be resistant to sanctions. Segezha plans to aggressively fill in the niches previously taken by companies from unfriendly states, but has a weak link in the form of a significant debt burden. However, this horizontal expansion will ease the problem of its gradual reducing over time.
It is very likely that the Russian stock market will see a serious reformatting and maybe an unprecedented growth. To that end, it is necessary to consider the positive experience of sanctions and try to attract potential private investors to the market. It will provide them a protection for their savings and cheap capitals for the further development of the business.
There is already a positive example – the Iranian stock market that felt the absence on non-residents. In 10 years, it became a real and effective tool for preserving the capital’s spending power. Naturally, we cannot be sure that we will see the same in Russia, but it is still a good example.
Decreased GDP, the devaluation of the national currency and broken trade contacts with Western companies had inevitably led to a growing inflation in the country. The Iranians were faced with question of how to preserve their savings, and the stock market became the best choice for many.
As of the beginning of 2022, Iran’s stock market grew by five times over the level of 2016-2018. Shares proved to be a good protection from devaluation and inflation.
But when comparing the two markets under sanctions one should keep in mind that Russia is still better integrated in the global economy, and sanctions will affect everyone. It would be very difficult to completely isolate the Russian economy.
The main conclusion we can make now is that the stock market helps to protect savings. And it is better to invest in it now while the prices for potential shares of Russian companies are at a minimum.
By Vladimir Rozhankovsky, Managing Director of Trade 123, LIFE