The Russian Stock Market Will Return to Long-term Growth
Capital Ideas spoke about the Russian stock market with Vitaly Isakov, Director for Investments at Otkritie Asset Management Ltd. (“Open Investments”).
What are the main problems facing the Russian stock market?
The major issue is that this year, and probably next year, the results of companies will become significantly worse, and uncertainty will grow. Under these conditions, it is difficult for investors to maintain a positive attitude, and thus most stocks have lost value: by 30, 40, 50 percent, and even more. The majority of domestic market players have fallen into a kind of apathy.
Some concrete negative events also took place, such as the cancellation of the dividends of Gazprom and a number of other companies. The confidence which supports the market in good times, and for example allows the American market to trade at a premium, has left the Russian market. When will it return? This process will likely take several years.
Market participants must first see that the financial results of companies are stabilizing, that they are beginning to pay dividends again, and that the goods and services of our corporate sector remain in demand – both on the domestic and world markets. This is when we can expect the return of market quotations to their more expected and fair level. I expect that this will take place within the horizon of the next three years.
What happened to the market after February 24? How much did it change?
The largest change was in the makeup of the participants in the market. The investments of nonresidents were frozen in response to unfriendly actions: the freezing of our foreign currency reserves in the West.
Do nonresidents from friendly nations show interest in the Russian stock market?
Unfortunately we do not have information about this, and can only fantasize. Yet if we fantasize, then it does not seem unreasonable that investors – say from the Asian region, maybe China or India – would be interested in holding stakes in Russian energy companies, for example.
Are Russian securities traded on western or other foreign stock markets, or have they been frozen like Russian assets in the West?
The fact remains: they are not currently traded on western exchanges, neither in London nor in New York.
Are the western sanctions having some kind of impact on the stock market?
The sanctions impact the results of companies. For example, Europe wants to stop buying Russian oil. Accordingly, Russian oil companies have to find new sales routes, organize new logistics, think up new calculations – and of course all of this has a short-term impact, leading to poorer financial results. Thus the sanctions have an impact, but indirectly rather than directly.
To this we can add the increase in uncertainty now seen on the currency market. Recently there was mention in the mass media that the Central Bank was preparing even to ban the use of the dollar – although of course this was not the case. Yet such a scenario is now being discussed, which creates problems and uncertainty. We have companies which have large revenues and significant savings in dollars, and now they are forced to think about how to minimize their potential risks and what to do with all of those dollars.
How do you see the future of the stock market in the short term, say to the end of the year?
Short-term forecasting is a thankless task. In the long term we have a positive outlook about the Russian market. Financial results will recover, just as it happened in all of our previous crises: 1998, 2008, 2020. Companies will return to paying dividends, and when investors feel this, confidence will begin to return – and higher and higher prices will be paid for shares.
For example, it is now being discussed what will happen after the admission to trading of nonresidents from friendly countries. Everyone is afraid that they will begin to sell Russian stocks. What is the danger here? It could lead to a further decline in quotations after the drastic fall which has already taken place, which would depress confidence. The stronger the pressure on the confidence of the participants in trading, the longer it will take the Russian market to recover in the end.
Is it possible to outline two possible scenarios of the development of the Russian stock market in the long term, pessimistic and optimistic?
The functioning of the stock market is based on the functioning of capitalism as the economic system of the country. When a company has positive conditions for its activities, and is able to earn money and make a normal profit, a part can be paid as dividends and a part invested back into the development of the business itself – as a result of which the dividends grow. It was stated more than once that to all outside challenges such as sanctions and attempts to pressure, Russia will respond with liberalization and the support and development of entrepreneurship. We will continue moving along the capitalist path that we have been trying to follow in recent years. If we are indeed able to do this, if private initiative remains at a high level and is rewarded, if conditions are created for companies to work and earn money – then I have no doubt that the market will recover, reach new record highs, and return to the track of long-term growth.
The most pessimistic scenario is probably an attempt to return to a command or semi-command economy, tightening of the tax system, and the future growth of the state sector in the economy. In conditions like these the outlook would not be as bright, and I want to believe that we will not take this path.
