The Russian stock market fell at a record pace and the ruble plunged after Moscow launched a full-scale invasion of neighboring Ukraine.
The Moex index briefly fell 45% before recovering for a 34% drop, while the ruble fell to a record low against the dollar after Vladimir Putin launched a “special military operation” to demilitarize and “denazify” Ukraine.
Shares of oil and gas majors fell, with Gazprom down 39% and Lukoil and Novatek down 24% and 36% respectively, leaving the Moex down 42% year-to-date. The scale of the market shock suggests investors were expecting the Russian president to back down.
“You have the panic button right now, I don’t think the market has priced in the risk of a real military conflict,” said Emmanuel Cau, head of European equity strategy at Barclays. “At the moment, it’s hard to see what could be a trigger for the market to stabilize.”
The invasion also triggered a decline in London-based Russian stocks traded in global certificates of deposit – a type of bank certificate that securitizes ownership of shares.
Sberbank, the most actively traded Russian stock on the London Stock Exchange, fell 73%. Gazprom fell 37% while Lukoil fell 72%.
“Right now people are saying ‘get me out and get me out at all costs,'” said Luis Saenz, head of international distribution at Sinara, a Russian investment firm. “The vast majority of people expect the next round of sanctions to impact their ability to invest in Russian stocks.”
The Moscow stock exchange had previously halted trading after the ruble fell to 89 to the dollar following reports of explosions in several Ukrainian cities. The Russian currency rallied slightly after the central bank said it would intervene to stabilize the market.
Russian bond prices fell amid tight trading conditions as markets reopened after Wednesday’s bank holiday and markets reacted to new sanctions preventing US and European investors from trading any new Russian debt issued from the start. March. Dealers were pricing Russian 10-year bonds with yields as high as 15% – down from less than 11% on Tuesday – but huge spreads between bid and ask prices meant few real trades were made, said Investors.
“Brokers basically say if you want to buy we can give you a price, but if you sell forget it,” said an analyst at a major asset manager. “The fear is Iranian-style sanctions where even if the Russians want to pay you back, there’s no way to get the money to you.”
Some fund managers believe this week’s new restrictions on Russian bonds could be a prelude to tougher restrictions that prohibit them from buying or selling existing Russian debt. The cost of insuring Russian debt against default more than doubled in two days, with five-year credit default swaps trading at a spread of 740 basis points. In a sign of growing concern, some dealerships have switched to a type of pricing often used in distressed credits.
Now that Russia has attacked Ukraine, “the sanctions imposed are going to be significant unlike the soft sanctions imposed on Tuesday and Wednesday,” said Charlie Robertson, chief economist at Renaissance Capital, referring to the measures announced by the United States, EU and UK earlier this week.
Ukrainian bonds also extended their recent declines, with the price of a bond maturing in 2032 falling to 62 cents on the dollar, according to Refinitiv. Investors said some brokers were quoting much lower prices for Ukrainian debt. A “full-scale war” would likely lead to Ukraine’s debt default, Robertson said.