Russian stocks and bonds took a further hit on Monday, while the rouble also sank, as investors reacted to warnings of a rising threat of military action against Ukraine.
Moscow’s Moex stock index was down more than 5.5 per cent, taking its losses so far this year to nearly 15 per cent, following the partial withdrawals from their embassies in Ukraine by the US and UK. Russia’s government debt also slumped, pushing yields to their highest level in six years, as the potential for swingeing western sanctions prompted investors to dump Russian assets.
“All the weekend news is pretty bad,” said Viktor Szabo, an emerging markets fund manager at Aberdeen Standard Investments. “No one wants to be left holding long positions in Russia, so everything is selling off today.”
The rouble lost more than 2 per cent against the dollar to hit its weakest level since November 2020. The slide prompted the Russian central bank to halt its regular foreign-exchange purchases in a move it said aimed to “reduce the volatility of financial markets”. The rouble trimmed its losses after the announcement to trade 1.7 per cent lower, down more than 10 per cent since October. The yield on Russia’s 10-year local currency government debt climbed to 9.75 per cent, up from 7.5 per cent three months ago and the highest since early 2016.
The latest sell-off came as the UK ordered some of its embassy staff to leave Ukraine, after the US ordered family members of its embassy staff to leave Kyiv because of the risk that Russia would take “significant military action”. Nato has also said its members are putting military forces on standby and “sending additional ships and fighter jets” to allied countries in eastern Europe.
Russian assets have come under increasing pressure during weeks of mounting tension on Ukraine’s eastern border, where Russia has amassed about 100,000 troops while making sweeping security demands of the US and Nato. The growing threat of conflict has jolted western investors who loaded up on Russian assets last year, drawn by the country’s high interest rates and conservative management of its economy compared with many other emerging markets.
Russian bonds and its currency are now extremely cheap, but investors are preparing for the possibility that tighter western sanctions — such as a prohibition on trading Russian bonds in the secondary market — could leave them stuck holding rouble assets, according to Szabo. The US and EU have threatened stronger curbs in response to any attack, which could include moves to cut off Russian banks from the global financial system and restrictions on the oil and gas exports that provide half of the Kremlin’s budget revenue.
“It has by far the best economic policy to be found in emerging markets,” he said. “But if things go pear-shaped it would be a very difficult conversation to have with clients if you’re trapped onshore.”
Russian debt comprises more than 7 per cent of a widely followed JPMorgan index of emerging market local currency bonds, meaning many big investors are in effect forced to hold the bonds or risk underperforming their benchmark. That would leave a lot of potential forced sellers of Russia bonds in the event that new sanctions resulted in their ejection from indices.
Additional reporting by Henry Foy in Brussels.