The war in Ukraine continues to rage. After the Invasion, Russia was hit with some of the harshest sanctions the world has ever seen. It was even kicked out of the International banking system SWIFT!
Vlad Putin himself described these debilitating sanctions as being akin to a declaration of war! Think about it, without access to the International Banking system, how will the Russian Government and its Companies pay their debts. How will their banks access capital? This is like the GFC in 2008 happening in Russia overnight, without warning!
The Russians are now scrambling to fix these problems whilst carrying out a war at the same time.
These events have led to the Russian stock market being closed for over a week now and sent Russia’s biggest stocks tumbling on Overseas exchanges. In fact, these behemoths have become Penny Stocks as Western Funds scrambled for the exit door before trading in Russian Stocks was suspended.
Traders can look at a lot of factors when picking a stock to trade, Technicals, Fundamentals, Macro. But the most simple and most powerful factor that trumps all in the short-term is supply and demand!
As the severity of International sanctions became more clear, there was a ripple effect that sent Russian stocks tumbling fast.
Western leaders froze the assets of Russia’s central bank, limiting its ability to access $630bn (£470bn) of its dollar reserves.
The US, the EU, and UK also banned people and businesses from dealings with the Russian central bank, its finance ministry, and its wealth fund.
Selected Russian banks will also be removed from the Swift messaging system, which enables the smooth transfer of money across borders. The ban will delay the payments Russia gets for exports of oil and gas.
Even the MSCI declared Russia “uninvestable” and removed it from Key Indices.
The conditions required for a functioning equity market are no longer in place in Russia, according to Dimitris Melas, Head of Index Research and Chair of the Index Policy Committee at MSCI.
These events led to Russia doubling its interest rates to over 30% and halting trading on its Stock Exchange. Foreign investors hold tens of billions of dollars worth of Russian stocks and bonds, which they could no longer get access to.
The final piece of the puzzle was this. As all this played out, Russian stocks were still listed on International Stock Exchanges. Some large sovereign funds (such as Norway and Australia) decided they no longer wanted any exposure to ANY Russian stocks. This commitment meant that they were willing to get out at any cost. This huge selling significantly outweighed any buyers for Russian stock out there and caused Russian stocks to fall to almost 0 before trading was halted on the London Stock Exchange (LSE).
Here is How the Charts Played Out:
Gazprom (OGZD) trades to 0.03 pounds in London before bouncing to 0.50 before being suspended. Traded at 5.00 pounds just a few days earlier
Sberbank (SBER), Russia’s largest bank trades at 0.01 pounds before closing at 0.0453 pounds before being suspended. Traded at over $4 pounds just a few days earlier.
Russian stocks traded as if they were all going to default and go Bankrupt!
What Happens Next?
No one can say. Bankruptcy is possible. Will Russia default, or will they find a way to delay payments and be re-integrated into the world financial system after this is all over?
If they are able to pay the debts, which they are now trying to do in Rubles while disconnected from SWIFT, these stocks could be trading for pennies on the Dollar and could see significant rebounds if backed by the Russian government. For example, we saw similar action with Airline stocks in the U.S during the Covid Outbreak.
Let’s pray for the people of Ukraine and hope that all parties concerned to come to their senses. A default could send huge ripple effects throughout the entire financial system.