Two sides of the sanctions medal. Reverse: where to invest?

The avalanche-like increase in sanctions pressure on the Russian financial system clarifies to crystal clearness a problem that has not been resolved during the entire post-Soviet development of the Russian economy. The Russian stock market in terms of capitalization and industry diversity of Russian companies represented on it is not comparable with the markets of economies equal to it in terms of volume.

The size of the largest economies and the capitalization of stock markets, USD billion

Rice. 1. Correlation between GDP and capitalization of stock markets. The chart was built by the author using data for 2002: GDP at PPP – source: IMF estimate, stock market capitalization – source: ru.theglobaleconomy.com

The size of the economies in the chart above is measured in purchasing power parity, while the stock market is measured in terms of the exchange rate. If the size of GDP is also taken at the exchange rate, then the difference between the USA, Great Britain and Japan, on the one hand, and the largest developing countries, on the other, will be even more significant.

But even these figures do not fully reflect the difference that the private investor faces. Citizens in the UK and the US have access to investments in precious and industrial metals, exchange-traded commodities and a huge range of derivative financial instruments. The inclusion of most regional markets in the global market and the development of a modern exchange trading infrastructure allow investors from the United States to work in almost any financial market in any country.

From this point of view, the Russian stock market looks rather like a working model, where company shares are quoted and money can be invested, but there are much fewer opportunities for investors than in “civilized” countries.

For Russian blue chips, the Russian stock market is not a source of investment. The main money is brought by IPOs in London or New York, for a change – in Hong Kong or Shanghai. Although the largest investments in Russian companies were made as an asset swap. For which the listing of shares on the stock exchange was a convenient help, although not a strictly mandatory requirement.

Prior to recent events, private Russian investors also had a wide choice of investments on the stock exchanges of Europe and America in any public companies. The largest Russian banks, investment and brokerage companies provided such an opportunity.

Is it possible to build a “real” stock market in one single country?

This question should arise in the face of increasing sanctions not only against Russian state-owned banks, but also against private Russian investors and even against individuals who have accounts, for example, in the UK.

Previously, the source of the main investments in the Russian economy was money directly from the state (the National Welfare Fund, budget expenditures), money from state corporations (such as Rosatom, Gazprom, Rosneft, VEB, VTB, partly Sberbank) and money of large export-oriented companies. Only small companies in growing market segments could make a serious bet on private investors. In Russia, there were no large investment funds, like those that make the main weather in the US (and global) stock markets.

Because of this (and not only) the Russian model of the economy is poorly adapted to the use of funds from private investors. Dividends, which bring income significantly higher than inflation, are paid by several Russian companies. And the rise in the price of most Russian stocks was, on average, lower than in the US, where it was fueled by dollar emission. As a result, people kept money in bank deposits (which was welcomed by several large banks), invested in real estate (primarily to please the Moscow construction complex). And if these options did not suit them, and Russian shares seemed to be of little profit or insufficiently reliable, they invested in foreign markets.

Now it becomes very difficult and risky. And attempts to transfer money from Russia to Europe and America create pressure on the ruble exchange rate.

The ban on the sale of securities owned by foreign investors, which was introduced by the Central Bank of the Russian Federation on February 28, is intended to prevent a collapse of the Russian market. But if the sanctions are not lifted – and this option does not have too many chances yet, then something will have to be solved with the problem of private investors. list of sanctions against russia list of sanctions against iran what are the sanctions on iran impact of sanctions on iran sanctions against russia 2021.

Three scenarios

The simplest, but also the most unlikely option is a rollback to the past state of affairs, the lifting of the most severe sanctions and the return of the Russian economy to the global world.

An optimistic (and also unlikely) scenario means a more or less successful existence of the Russian economy under sanctions. Including the existence of either the stock market or the development of the bond market, which is more likely. This will make it possible to use the money of Russian investors for the development of the Russian economy, primarily in terms of import substitution.

A pessimistic option from the point of view of investors means a gradual transition to a directive model of the economy. At the same time, even its successful implementation will not enable ordinary investors to increase or at least protect their savings from inflation.

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