• An eerie calm seems to have settled over the Russian markets. But scratch below the surface, and almost everything has changed.
  • The government backs the ruble and maintains the Moscow stock market, with foreign investors virtually banned.
  • Iskander Lutsko of Moscow-based broker ITI Capital tells Insider what’s happening in the “completely artificial” markets right now.

Almost two months after Russia invaded Ukraine, an eerie calm seems to have settled over 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 remain deep in negative territory for the year, but the sell-off seen in late February is a thing of the past.

Yet, peek below the surface and you will see the strong arm of the Russian state forcefully holding the markets together. The government implemented strict capital controls that drove up the rouble, and it banned foreign investors from dumping domestic assets.

Iskander Lutsko is Chief Investment Strategist at ITI Capital, a leading financial broker in Russia. He worked in financial markets for 15 years, including at Sberbank, Russia’s largest lender. He spoke to Insider this week about what’s really going on in Russia’s “completely artificial” markets right now.

Actions do not reflect ‘unfortunate reality’

Moscow’s Moex stock index has fallen about 40% so far this year, but has risen about 9% since its low in late February.

Lutsko thinks his level should be considerably lower. “The Russian stock market does not reflect the unfortunate and true reality,” he said. “Simply because non-residents can’t sell.”

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

“According to our estimates, at least $50 billion of equity exposure is still on fund balances,” Lutsko said. “Mainly US dedicated funds or European funds.

A recent move by Moscow ordering Russian companies to revoke any listing of shares they hold overseas could trigger a wave of sales, he said, once those so-called certificates of deposit are repatriated. .

“According to our estimates, there are at least 900 billion rubles [$11 billion] value of overseas depository receipts of Russian stocks that could be sold by local investors on Moex,” he said.

The lack of foreign players in the market has caused


dry up, making it harder to buy and sell assets. Retail investors – who have “little understanding and idea of ​​how to play the market” – now dominate trading, according to the Moscow broker.

The vultures come to play

On the bond market, the situation is even worse. The Russian government and many of its biggest companies are on the verge of defaulting on their foreign debts, after US sanctions hampered their access to the global financial system. The bonds of many large companies, such as Gazprom, have plunged.

But Lutsko said the fall in prices had attracted bargain hunters, hoping to take advantage of a price rebound if the situation in Ukraine cleared up. Although he avoids the term, these investors are generally referred to as “vultures”.

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

Guernsey’s ITI entity facilitated these exchanges, buying bonds at 20-30% of their face value. “There has been a huge amount of interest,” Lutsko noted.

The ruble is “completely artificial”

The rapid rebound of the Russian ruble has some analysts wondering if Western sanctions are having the intended effect.

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

“The ruble is in a completely artificial environment, regulated by the central bank which ensures that


remains limited,” he said. “We have a bit of dissonance or dislocation in the assets.”