Regaining all losses since the conflict, where does the resilience of the Russian stock market come from?

Investment Highlights

On July 16, 2024, the International Monetary Fund (IMF) released an updated version of the "World Economic Outlook" report. According to the IMF's forecast, Russia's real GDP growth rate in 2024 is expected to reach 3.2% (compared to 3.6% in 2023), exceeding the growth rates of major developed economies in Europe and America for two consecutive years. In addition, in June 2024, Russia's manufacturing PMI recorded 54.9, marking 26 consecutive months above the boom-bust line.

Against the backdrop of comprehensive sanctions imposed by Western countries on Russia, why does the Russian economy and stock market remain resilient? Possible reasons include: diversification of energy export markets, encouragement of domestic production through import substitution, reduced dependence on Western financial systems, stabilization of financial markets through monetary policy and capital controls, and adjustment of economic structure to promote manufacturing development. Strong investment activity and increased government spending play a key supportive role in economic growth.

O Russian Stock Market Basically Recovers Since the Russia-Ukraine Conflict

Looking at the fluctuations over the past two years, the Russian MOEX index has performed well among European stock markets. As of June 20, 2024, the Russian MOEX index has returned to pre-Russia-Ukraine conflict levels, rising by 1% compared to the closing price on February 23, 2022. The industry index performance during this period ranked from highest to lowest as follows: transportation (+72%), information technology (+29%), consumer goods (+26%), real estate (+22%), telecommunications (+20%), finance (+19%), utilities (+16%), chemicals (+12%), oil and gas (+9%), raw materials (-25%), with most industries seeing an increase except for raw materials.

O Resilience of the Russian Economy Exceeds Previous Institutional Predictions

According to the IMF's forecast, Russia's real GDP growth rates in 2024 and 2025 are expected to reach 3.2% and 1.5% respectively. Russia's 2024 real GDP growth rate will significantly exceed the growth rates of major developed economies in Europe and America. Strong investment activity, increased government spending, rising consumer demand, and stable oil exports are all positive factors supporting economic growth.

O Strong Investment Activity Supports Russian Economic Growth

Since 2022, facing Western sanctions, the Russian government has promoted import substitution policies, encouraged domestic production, and incentivized enterprises to increase investment to meet domestic market demands. To break through the blockade, Russian companies have also increased investment in research and technological upgrades. In addition, the increase in defense orders has provided growth momentum for the manufacturing industry, indirectly promoting investments in related supply chains and supporting industries. These factors have collectively led to an increase in fixed asset investment, with strong investment activity supporting Russia's economic growth.

Main Content

Since the Russia-Ukraine conflict in 2022, Russia has undergone profound changes in the economic and social sectors. Despite facing harsh sanctions from the West, the Russian economy and stock market have remained resilient. From the second quarter of 2023 to the first quarter of 2024, the Russian economy has grown for four consecutive quarters, with quarterly real GDP growth rates of 5.1%, 5.7%, 4.9%, 5.4%. Calculated at nominal prices, the year-on-year growth rate of nominal GDP in the first quarter of 2024 may even reach 19.5%. Since May 2022, Russia's manufacturing PMI has been above the boom-bust line for 26 consecutive months, with a high of 54.9 in June 2024.

At the same time, Russia's representative stock index, the MOEX Index (priced in rubles), has rebounded significantly since October 2022, with its performance in the past 2 years ranking among the top in European stock markets. Despite the comprehensive sanctions imposed by Western countries on Russia, why has the Russian economy and stock market remained resilient? Possible reasons include diversification of energy export markets, encouragement of domestic production through import substitution, reduced reliance on Western financial systems, stabilization of financial markets through monetary policy and capital controls, and adjustment of economic structure to promote the development of the manufacturing industry. The rise in international energy prices has helped Russia to offset the negative impact of sanctions to a certain extent. Increased government spending and strong investment activities have played a key supportive role in economic growth.

1.1 Russian Stock Market Basically Recovers Since Russia-Ukraine Conflict

On February 24, 2022, the Russia-Ukraine conflict broke out, causing the Russian MOEX Index to plummet 45% intraday, triggering a circuit breaker and hitting the largest intraday decline, eventually closing down 33%. The next day, Russia urgently announced a trading halt and took continuous measures to stabilize the financial market. After nearly a month of closure, the Moscow Exchange in Russia resumed trading of 33 stocks on March 24, but short selling was still prohibited. After the opening, the Russian stock market quickly stabilized and began to rebound. As of June 20, 2024, the Russian MOEX Index has recovered to the level before the Russia-Ukraine conflict, rising 1% from the closing price on February 23, 2022. The performance of industry indices during this period from highest to lowest are: transportation (+72%), information technology (+29%), consumer goods (+26%), real estate (+22%), telecommunications (+20%), finance (+19%), utilities (+16%), chemicals (+12%), oil and gas (+9%), raw materials (-25%). Except for the raw materials industry, most other industries have seen increases.

The two representative stock indices in Russia are the RTS Index and the MOEX Index, with similar constituent stocks. The main difference is that the MOEX Index is priced in rubles, while the RTS Index is priced in US dollars. The MOEX Index is favored by domestic investors in Russia, while foreign investors tend to use the RTS Index Since the introduction of the new ruble by Russia in 1998, the ruble exchange rate has depreciated from 5.96 rubles per US dollar at the beginning of 1998 to 85.7 rubles per US dollar at the end of June 2024. The depreciation of the ruble has led to the MOEX index in Russia outperforming the RTS index since 1998, with the performance of the MOEX index and RTS index being highly similar when excluding the exchange rate impact.

On February 24, 2022, the first trading day after the Russia-Ukraine conflict, both the Russian MOEX index and RTS index experienced sharp declines, with the MOEX index falling by 33.3% on that day. The RTS index saw an even higher decline of 39.4% compared to the previous trading day. With the introduction of various counter-sanction measures by Russia, large Russian enterprises have largely adapted to Western sanctions pressure, leading to a significant increase in Russian stock indices from October 2022 to May 2024.

In terms of stock market performance over the past two years, the Russian MOEX index has performed well among European stock markets. The MOEX index lags behind the Italian FTSE MIB, German DAX, Spanish IBEX35, and Dutch AEX indices, but leads the UK FTSE 100, French CAC40, and the representative STOXX600 index.

The Russian MOEX index, formerly known as MICEX, tracks the performance of the 50 largest Russian companies listed on the Moscow Stock Exchange. The index was launched on September 22, 1997, with a base point of 100, and was officially renamed from the MICEX index to the MOEX index in December 2017. The composition rules were also partially modified, with the number of constituent stocks no longer fixed and subject to quarterly review.

As of July 14, 2024, the Russian MOEX index includes 49 constituent stocks, with large-cap companies mainly distributed in the energy, materials, utilities, and financial sectors. Looking at the performance over the past two years, financial and consumer goods companies in the MOEX index have generally recorded gains, while most utilities and energy companies have seen increases, and the materials sector companies have mixed performances. Since the beginning of 2024, Russian airlines, Sistema Corporation, and PIK Group have recorded gains of 57.8%, 39.4%, and 26.6% respectively, ranking among the top three performers in the MOEX index constituent stocks

1.2 Russia's Economic Resilience Exceeds Previous Institutional Forecasts

On July 16, 2024, the International Monetary Fund (IMF) released an updated "World Economic Outlook" report. The IMF's latest forecasts for global economic growth for this year and next year remain consistent with those from April 2024, with projected growth rates of 3.2% and 3.3% for 2024 and 2025, respectively. In terms of regions, emerging markets in Asia are the main engines of global economic growth. The IMF has raised its growth forecasts for China, India, and other Asian emerging economies. The IMF expects the U.S. economy to grow by 2.6% in 2024, slightly lower than the 2.7% forecasted in April 2024. The IMF forecasts a Eurozone economic growth rate of 0.9% in 2024, up by 0.1 percentage point from April. The IMF has made optimistic predictions about Russia's economic prospects for the next two years. According to the IMF, Russia's real GDP growth is expected to reach 3.2% and 1.5% in 2024 and 2025, respectively. Russia's GDP growth in 2024 is expected to be significantly higher than that of developed economies, the Eurozone, and the U.S. Factors supporting economic growth include strong investment activity, increased government spending, rising consumer demand, and stable oil exports.

Since the Russia-Ukraine conflict, the U.S. has announced sanctions on Russian oil, natural gas, and coal, revoked normal trade relations, and increased tariff barriers. While the EU has not immediately followed suit, it expressed a desire to significantly reduce natural gas imports from Russia. The subsequent "Nord Stream" incident has exacerbated energy supply tensions in Europe. Due to energy price fluctuations and diversification of energy export markets, the impact of energy sanctions on Russia has been less than expected.

In 2022, the global crude oil market experienced drastic fluctuations, with prices showing a clear inverted "V" shape trend. At the beginning of 2022, due to geopolitical tensions, global risk aversion surged, leading to a rapid increase in oil prices. In early March, Brent crude oil prices briefly touched a high of $139 per barrel. However, as the International Energy Agency coordinated the release of a large amount of strategic reserves, market supply tensions eased, and oil prices gradually fell to around $100 per barrel. In the second half of the year, as global economic growth slowed and demand weakened, oil prices began to decline. In December, Brent crude oil prices fell to a yearly low of $75 per barrel. Since 2023, events such as the armed conflict in Sudan, the Israel-Palestine conflict, and the crisis in the Red Sea shipping lane have further heightened market concerns about supply stability. Crude oil prices have shown a volatile upward trend, with rising oil prices boosting Russia's oil export revenue

From the perspective of the PMI index, in June 2024, the manufacturing PMI in Russia was 54.9, and the service PMI was 47.6. The manufacturing PMI increased by 0.5 compared to May, and has been above the boom-bust line for 26 consecutive months. The strong performance of Russia's manufacturing sector is attributed to the growth in domestic demand and effective import substitution strategies. Despite limited growth in export orders, the increase in domestic orders has effectively driven overall economic activity. At the same time, the significant increase in manufacturing employment reflects market vitality and business confidence in future development. In contrast, the service PMI in Russia in June 2024 dropped to 47.6, a decrease of 2.2 from May, falling below the boom-bust line of 50, with service activities contracting for two consecutive months.

In terms of inflation levels, as of June 2024, Russia's Producer Price Index (PPI) increased by 14% year-on-year, reaching double digits for 11 consecutive months. As of June 2024, Russia's Consumer Price Index (CPI) increased by 8.6% year-on-year, a 0.3 percentage point increase from the previous month, with Russia's CPI rising continuously for 14 months. Currently, Russia's inflation level remains high, with possible reasons for high inflation rates including: the impact of economic sanctions on imported goods supply, increased demand due to military spending and corporate equipment investments, tight labor market, and growing consumer demand.

Since the Russia-Ukraine conflict in 2022, to alleviate the crisis of rising prices and ruble depreciation, under pressure from Western sanctions, the Central Bank of Russia implemented emergency interest rate hikes. On February 28, 2022, the Central Bank of Russia temporarily raised the policy rate from 9.5% to 20%, the highest level in nearly twenty years. This was done to address the risks of significant ruble depreciation and increased inflation pressure under Western sanctions, while protecting people's savings. As the situation stabilized, the Central Bank of Russia gradually lowered the policy rate to 7.5% by the end of September 2022. In the second half of 2023, the Central Bank of Russia adjusted its rate policy again to address economic challenges. On July 25, 2023, the Central Bank of Russia announced a 100 basis point increase in the policy rate to 8.5%. Subsequently, on August 15, the Central Bank of Russia further raised the policy rate by 350 basis points to 12%. On September 18, another 100 basis point increase to 13%. On October 30, a 200 basis point increase to 15%. By December 18, the Central Bank of Russia announced an increase in the policy rate from 15% to 16%. In response to the issue of rising inflation, a total of five rate hikes were implemented in the second half of 2023 Since 2024, as of July, the Central Bank of Russia has maintained the policy interest rate at 16%, but it is still facing high inflationary pressures.

1.3 Strong Investment Activities Support Economic Growth in Russia

Since 2022, facing Western sanctions, the Russian government has promoted import substitution policies, encouraged local production, and reduced reliance on foreign products. This has led to increased investments by businesses to meet domestic market demands. The Russia-Ukraine conflict has led to a surge in investments in the military and related industries in Russia. The increase in defense orders has provided growth momentum for the manufacturing industry, indirectly promoting investments in related supply chains and supporting industries. To cope with sanctions and enhance competitiveness, Russian companies have also increased investments in research and technological upgrades. These factors have collectively boosted fixed asset investments, with strong investment activities supporting economic growth in Russia.

The strong investment activities and increased government spending have significantly impacted the growth rate of Russia's GDP. According to statistics, in 2023, Russia's fixed asset investments reached 34 trillion rubles, an increase of about 20% year-on-year, demonstrating Russia's sustained strong growth momentum in fixed asset investments. In the first quarter of 2024, Russia's fixed asset investment amounted to 5.9 trillion rubles, an increase of about 26% year-on-year. The contraction of net exports and the continuous high contribution of investment activities to Russia's GDP reflect the shift in the driving force of Russia's economic growth from external demand to internal investments.

Authors: Huafu Jinhuan, Yan Xiang (Yan Xiang, S0210523050003), Source: Huafu Research Macro, Original Title: "Analysis of the Resilience of the Russian Stock Market - Global Hotspot Observation Series (4)"