Russian stocks may have no value compared to the prices listed on the Moscow Exchange, according to new research.
The exchange shut down for a month after Russia's invasion of Ukraine, the longest shutdown since the fall of the Soviet Union. The Moscow Exchange's recognized status was revoked by many international powers.
International investors in Russian securities have suffered restrictions in managing and valuing their positions since the war began, as the MOEX Russia Index is down more than 36% year-to-date.
According to a model that links stocks and bond markets, the market for credit-default swaps suggests that Russian stocks may be worthless, in contrast to the prices listed on the exchange.
Credit-default swaps allow investors to swap their credit risk with other investors on a company, country or other entity. The investor pays the lender if the borrowers default on their debt obligations.
The incongruity between the listed prices of Russian stocks may be due to a combination of technical-default fear, failure of the CDS auction mechanism, restrictions on tradingCDS linked to the securities of sanctioned companies and a lower perceived value of Russian.
The model assumes that if a firm's stock price goes to zero, it will default on its debt. The value of a company's debt is what determines its default risk.
This concept has been used to calculate default probabilities from share prices, but it can also be used to infer equity prices from default probabilities.
Since the start of the Russia-Ukraine war, trading in Russian corporate credit default swaps has increased. Increased trading activity may indicate that the market has information that isn't in the equity market. The research incorporates the implied default probabilities of the credit default swaps market.
Russian stocks have fallen by 36% since the invasion, but the prices when aligned with the market were essentially zero.
A basic explanation is that investors are not trading on the other market. Most foreigners are unable to trade Russian stocks, and the only way to do so is through institutional investors.
The model's results could be the result of the market being distorted by the Russia-Ukraine war, according to the research. The underlying bonds would have to be auctioned if there was a default.
Difficulty in transferring these bonds due to sanctions may inflate the premium required for default protection.
If the firm is unable to make bond payments due to sanctions, a technical default could occur, where the firm is not actually bankrupt but is unable to pay coupons or principal.
All areas of the market have seen some level of distortion because of Russia's tightly restricted market.
Russian companies may have value to the small fraction of investors who can invest in them because they still operate, generate revenue and pay dividends. Russian stocks seem to be worthless from the perspective of investors.
The lack of value may be the result of a combination of technical-default fear, failure of the auction mechanism, and restrictions on trading credit default swaps linked to the securities of Russian companies.
He suggested that the reopening and reintegrating of Russian markets and the lifting of sanctions could lead to greater consistency in pricing, but said that investors may want to look beyond a single asset class.
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