Putin Puts Russian Stock Market On Path To Total Obscurity

Vladimir Putin managed to reopen the Russian stock market. Sort of.

33 out of 50 stocks on the Moscow Exchange were allowed to trade for four hours Thursday, but price discovery is basically illegal.

Short selling is banned and foreigners aren’t allowed to exit positions. Russia’s SWF, the National Wellbeing Fund, was set to spend as much as $10 billion in an effort to prevent a crash, a re-run of a $7 billion plunge protection scheme deployed in 2008.

It’s not, as one Dubai-based strategist put it Thursday, a “functioning market.”

Thursday’s farcical 4.4% rally (figure above) did manage to serve one important “function,” though. It made a handful of Russian billionaires more than $8 billion richer, on Bloomberg’s calculations.

That’s only “fair.” We are, after all, talking about the single most flagrant kleptocracy in modern political history. So, of course the carefully choreographed resumption of trading in shares with primary domestic listings found a handful of tycoons recouping some of their losses.

Putin’s grip on power is contingent, in part anyway, on a reciprocal relationship with the country’s wealthiest people. It’s true that he has a monopoly on the use of force as long as the military is in his pocket. And Russia’s oligarchs habitually insist they have no “say” in Kremlin matters. But the idea that the oligarchy (never mind the mob) will happily go broke out of patriotic duty is laughable, especially when “patriotic” has become an entirely subjective term, defined by one man.

Volume was elevated during Thursday’s staged session in Moscow. It’s not a stretch (at all) to say state-buying was responsible for the gains, nor is it hyperbole to suggest Putin will prevent any kind of price discovery from occurring for the foreseeable future. It’s virtually impossible to imagine the Kremlin allowing foreigners to sell under the circumstances.

Do note: When I say price discovery is “basically illegal,” I mean that literally. This isn’t the figurative sense in which central banks have suppressed price discovery across assets since Lehman by engineering an ongoing hunt for yield, which drove investors out the risk curve and down the quality ladder. In this case, illegal means illegal.

Russia’s stock market has a date with obscurity. Russian equities and fixed income were summarily booted from almost all relevant global benchmarks in the days and weeks following the invasion and internationally-listed shares of Russian companies effectively went to zero (figure below). ETFs tracking the country’s equities are in limbo.

The White House made fun of Putin. Russian stocks are a “Potemkin market,” the Biden administration said Thursday. “This is not a real market” and it’s “not a sustainable model,” a statement read, noting that the desperation inherent in Thursday’s reopening “underscores Russia’s isolation from the global financial system.”

Invariably, some market participants will suggest advanced economies operate Potemkin markets too. But there’s a key difference: Developed market central banks issue reserve currencies. Russia issues the ruble. If you think that distinction doesn’t matter, note that Elvira Nabiullina doesn’t agree. She’d tell you as much, but that’d be a “betrayal.”

We’ve seen this movie before in backwater nations and locales run by pariah regimes. Locals may buy stocks in a desperate attempt to hedge runaway inflation, but eventually, the world will stop paying attention because the “gains” will be seen as a byproduct of a failing economy, acute financial distress and distrust in a rickety, commodity-linked currency.

With apologies to analysts in Russia whose fault this most assuredly isn’t, there’s no utility whatsoever in quoting anyone operating out of Moscow. They can’t be objective. And not because they’re enamored with the situation or otherwise predisposed to donning rose-colored beer goggles. Rather, they can’t be objective because going on the record for Western media outlets with quotes that reflect the reality of the country’s dire economic plight could land them in prison — or worse.