War, Sanctions and a Closed Stock Market: Huge Loss for Investors in Russia

Russia's financial market, the Moscow Stock Exchange, has been closed for three weeks. No shares can be bought or sold, the share prices are frozen and have no relationship with what is happening in the outside world. Investors and investors must wait patiently as their invested capital evaporates. How did it come to this and what are the consequences? A reconstruction.

The invasion begins on Thursday, February 24 at 3 a.m., as the Russian army enters Ukraine. A few hours later, the Moscow stock exchange starts trading and the stock market collapses completely. The MOEX, the Russian AEX, plummets by 33 percent, the shares of large state-owned companies such as Lukoil and Gazprom are badly damaged and lose 20 to 25 percent. The price losses of the Russian shares listed there are even greater in London and New York.
A day later, there is a noticeable recovery in the price losses, a kind of convulsion. The MOEX closes the day 20 percent higher, Lukoil gains 6 percent and Gazprom 8.5 percent.

Sanctions are putting a stranglehold on Russian banks, companies and individuals and forcing the Russian central bank to take drastic measures. On February 28, it decides to definitively stop trading on the stock exchange. It is no longer possible to trade in shares and bonds, the money market is also being restricted.

The central bank is also doubling interest rates to 20 percent to stem the fall of the ruble and slow down the screeching inflation, which peaked at 9.2 percent in February.
Domestic and foreign investors are faced with a closed door in Moscow. Some Russian stocks can still be traded on the stock exchanges in London and New York, including the three major energy companies Gazprom, Lukoil and Rosneft. But the prices of those three collapse, the shares are only worth a few cents.

On Thursday 3 March, day eight of the war, the stock exchanges of London and Wall Street decide to cancel trading altogether.

Stock market closed
Stopping the stock market rarely happens, and only in crisis situations such as disasters, political chaos or terrorist attacks.

The first time on Wall Street was in 1914. At the outbreak of World War I, the stock market was closed for four months. In 2001, after the September 11 attacks, the stock market closed for four days to avoid panic and a stock market crash and because the stock exchange building was also physically inaccessible.

During the euro crisis in the summer of 2015, the Greek stock market closed for five weeks because the country threatened to fall out of the euro. In Egypt, the stock market was closed for almost eight weeks in February and March 2011 during the turbulent demonstrations in Tahrir Square in the Arab Spring.

The Russian stock market closing in times of war and severe financial and economic sanctions may be understandable, but it is not clear what needs to be done to resume trading. What is it waiting for? A victory in the war? Revocation of sanctions? The world's relationship with Russia has changed completely in three weeks, the break with the Russian market is deep and not easy to repair.

The Russian central bank announced a partial opening of the financial market on Friday. Trading in Russian government bonds will resume from tomorrow, but the stock market will remain closed for the time being.

That costs a lot of money. The price falls are huge and a recovery of the prices is unlikely: the invested capital has largely evaporated.

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The Russian economy is taking a huge hit.

Ralph Wessels, ABN Amro
"The stock exchange is an important capital market for companies and a well-functioning stock exchange is good for the business climate. That is in the interest of investors and investors," says Ralph Wessels, head of investment strategy at ABN Amro. "The Russian economy is going to take a huge hit, with all these sanctions and companies leaving. It will all stick to Russia for a long time to come and keep companies and investors away, and hinder Russian companies from financing and growth."

The market value of the Moscow stock exchange, the market value of all listed stock funds, was $650 billion at the beginning of this year and only a fraction of that is left. One sixth of the stock market value, approximately $85 billion, is held by foreign institutional investors, including pension funds. So there will have to be a lot of depreciation on Russian investments.

ABP was on time
Pension fund ABP narrowly escaped major losses on the Russia portfolio. At the end of September 2021, it had invested 2.2 billion euros in Russian equities and bonds, but the fund decided to reduce significantly at the end of the year. For example, a large part of the investments in Russian oil and gas companies was sold, along with many other investments in Russian companies and banks.

At the end of February, ABP still had 520 million euros in investments in Russia. ABP has announced that it now wants to get rid of everything, but realizes that selling is currently complicated and actually impossible, because Russia prohibits the sale of Russian interests by foreign investors.

Oil giants Shell and BP are hitting the same wall. They want to withdraw from Russia by selling the activities, but the Russians do not want to take it over and so Shell and BP leave empty-handed. BP says it expects a $22 billion write-off, while Shell expects a $3 billion loss.

Russia at war costs investors, investors and companies a lot of money left or right, so the financial pain is not only on the Russian side.