Russian stocks may have recovered some of their post-invasion losses, but the MOEX Russia, one of the most closely watched benchmarks of stocks trading in Moscow, is still down 40% since the start of the year in dollar terms, even though the Russian ruble has marched relentlessly higher as of late.
These losses haven’t deterred distressed investors in the U.S. and Europe, many of whom have been gobbling up Russian stocks and Russian ADRs. Yet, by at least one important measure of credit risk, an argument could be made that Russian stocks are essentially worthless — at least, according to a group of analysts from MSCI.
In a recent research note entitled “Are Russian Stocks Worthless?”, a handful of researchers from the global index manager looked at the spread between Russian corporate credit-default swaps and Russian equities.
“We find that trading in Russian corporate CDS has surged since the Russia-Ukraine war began. Increased trading activity may indicate that the CDS market contains information not present in the equity market. Thus, our research incorporates the CDS market’s implied default probabilities to model Russian equity prices,” the MSCI team wrote in their note.
The odds of default for Russia’s largest corporations over the coming five years has surged to more than 80%, from a prewar level of just 20%, according to the implied odds of default priced into the CDS.
They illustrated the divergence between the default risk implied by CDS trading levels in the chart below:
Source: MSCI
This would suggest that equity investors — a group that is presently being restricted by the Russian government to exclude most foreign investors — are pricing in much lower odds of default than those assigned by global credit markets. This dichotomy between who is allowed to own CDS vs. equities could be one factor driving the disconnect, MSCI said.
“A basic explanation for the disconnect is that investors trading on one market are not trading on the other. Most foreigners are unable to trade Russian stocks, and CDS are only accessible to institutional investors,” MSCI said.
Another is the heightened odds of a ‘technical’ default, which have risen ever since the U.S. Treasury earlier this week barred the Russian government from making bond payments to foreign bondholders, a move that’s apparently intended to force Russia into an embarrassing (and potentially economically destabilizing) technical default.
While the Biden administration imposed sanctions on Russia’s central bank shortly after the invasion of Ukraine, it allowed an exemption enabling Russia to pay its foreign bondholders. However, when that exemption expired this week, the Biden administration confirmed that it wouldn’t be renewed.
Although the MSCI analysts acknowledged that this artificial default pressure could be causing distortions in the market for Russian CDS, the present state of the Russian economy means “every part of the market has experienced some degree of distortion.”
What might fix this? Well, the MSCI team wrote that “greater price consistency is possible if Russian markets and the economy reopen and reintegrate, and the extensive international sanctions are lifted.”