Moscow broker explains the latest in Russia’s chaotic financial markets

• It seems that a strange calm has settled in the Russian markets. But scratching beneath the surface, almost everything has changed.
• The government supports the ruble and maintains the Moscow stock market, with foreign investors virtually banned.
• Iskander Lutsko, of brokerage ITI Capital in Moscow, told Insider what’s happening in “completely artificial” markets right now.

Nearly two months after the Russian invasion of Ukraine, a strange calm appears to have descended on the country’s financial markets.

The Russian ruble has now fully recovered from its dramatic collapse in the days following the attack. Stocks in the country are still deep in negative territory for the year, but the dramatic sell-off seen in late February is a thing of the past.

However, take a look under the surface, and you will see the strong arm of the Russian state firmly holding the markets together. The government introduced strict capital controls that caused the ruble to appreciate, and also prevented foreign investors from giving away domestic assets.

Iskander Lutsko is the chief investment strategist at ITI Capital, a major financial broker in Russia. He worked in the financial markets for 15 years, including at Sberbank, the largest bank in Russia. He spoke to Insider this week about what is really happening in Russia’s “completely artificial” markets right now.

Stocks do not reflect the ‘unfortunate reality’

Moscow’s Moex is down about 40% so far this year, but is up about 9% since hitting a low in late February.

Lutsko believes his level should be much lower. “The Russian stock market does not reflect the real unfortunate reality,” he said. “Simply because non-residents are prohibited from selling.”

In 2021, foreigners owned about 80% of tradable shares on the Moscow Stock Exchange, worth about $200 billion.

“According to our estimates, at least $50 billion of equity risk remains on fund balances,” Lutescu said. “Most of the money allocated to the United States or European funds.”

He said that Moscow’s recent ruling instructing Russian companies to cancel any listings of shares they have abroad may lead to a sell-off once the so-called deposit receipts are repatriated.

By our estimates, there are at least 900 billion rubles [$11 billion] The value of overseas deposit receipts of Russian shares that local investors can sell in Moex”.

Cause shortage of foreign players in the market

Liquidity

Until it dries up, making the asset difficult to buy and sell. Retail investors – who have “little understanding and idea of ​​how the market plays out” – now dominate the trading, according to the Moscow broker.

Eagles are coming to play

In the bond market, the situation is even worse. The Russian government and many of its largest companies are on the verge of defaulting on their foreign debt, after US sanctions impeded their access to the global financial system. Bonds in many large companies, such as Gazprom, have fallen.

But Lutsko said the price crash has attracted bargain hunters, hoping to benefit from a price rebound if the Ukrainian picture clears up. Although he eschews the term, these investors are commonly referred to as “eagles.”

“I know that many mid-sized hedge funds, and even many local brokers, are looking for opportunities to buy Russian international bonds,” he said.

The Guernsey entity of ITI facilitates these deals, buying bonds at 20-30% of their face value. “There is very, very high interest,” Lutscu noted.

The ruble is “fully synthetic’.

The rapid recovery of the Russian ruble has prompted some analysts to question whether Western sanctions are having the desired effect.

But Lutsko said that did not reflect the strength of the economy. The government imposed strict capital controls preventing the ruble from leaving the country, and instructed exporters to convert 80% of their foreign earnings into the currency.

“The ruble is in a fully synthetic environment, regulated by the Central Bank, which makes sure of it

volatility

“It’s still limited. We have a little bit of a dissonance or dissociation in the assets,” he said.