Are Russian Stocks Worthless? Here is an important indicator that should not be ignored

Russian stocks may have recouped some of their post-invasion losses, but the MOEX Russia, one of the most closely watched benchmarks for Moscow equity trading, is still down 40% year-to-date in dollar terms, despite the Russian ruble relentlessly increased lately.

Those losses haven’t deterred troubled investors in the US and Europe, many of whom have gobbled up Russian stocks and Russian ADRs. Still, on at least one important measure of credit risk, it could be argued that Russian stocks are essentially worthless, at least according to a group of analysts at MSCI.

In a recent research note titled “Are Russian Stocks Worthless?”a handful of researchers from the global index manager examined the spread between Russian corporate credit default swaps and Russian equities.

“We note that trading in Russian corporate CDS has skyrocketed since the start of the Russia-Ukraine war. Increased trading activity may indicate that the CDS market contains information that is not present in the stock market. Therefore, our research incorporates the implied default probabilities of the CDS market to model Russian equity prices,” the MSCI team wrote in its release.

The default probability for Russia’s largest companies has risen from a pre-war level of just 20% to over 80% over the next five years, according to implied default rates priced into the CDS.

They illustrated the divergence between default risk implied by CDS trading levels in the chart below:

Source: MSCI

This would suggest that equity investors – a group currently restricted by the Russian government to exclude most foreign investors – are pricing in much lower default probabilities than those assigned by global credit markets. That dichotomy between owning CDS and stocks could be a factor driving the split, MSCI said.

“A basic explanation for the split is that investors trading in one market are not trading in the other. Most foreigners are unable to trade Russian stocks and CDS are only available to institutional investors,” MSCI said.

Another reason is the heightened likelihood of a “technical” default, which has risen since the US Treasury Department blocked the Russian government from making bond payments to foreign bondholders earlier this week, a move that appears to have put Russia in an embarrassing (and… possibly economic) situation intended to force destabilizing) technical failure.

While the Biden administration imposed sanctions on Russia’s central bank shortly after invading Ukraine, it allowed an exemption that allowed Russia to pay its foreign bondholders. However, when that exemption expired this week, the Biden administration confirmed it would not be renewed.

Although MSCI analysts acknowledged that this artificial default pressure could lead to distortions in the Russian CDS market, the current state of the Russian economy means that “every part of the market has experienced some degree of distortion”.

What could fix this? Well, the MSCI team wrote that “greater price consistency is possible when the Russian markets and economy reopen and re-integrate and the extensive international sanctions are lifted.” Are Russian Stocks Worthless? Here is an important indicator that should not be ignored

Brian Lowry

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